Westpac Market Outlook April 2024
Our latest thinking on Australia, markets and the global economy.
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Watching and waiting. Over the past month, in many cases it was a matter of marking time – for central banks and for markets. Inflation risks continue to dissipate in Australia and globally, recent data suggest. Central banks can see the light at the end of the tunnel but are not quite ready to signal the “all clear” with respect to inflation. We remain of the view that the US FOMC will commence easing rates in June and see this as a pivotal moment for markets. On the rate outlook for 2024, US FOMC Chair Powell continues to voice conditional support for the three rate cut median forecast of FOMC members. We anticipate that the US easing cycle will trigger the beginning of the next phase of the US dollar downward trend. Alongside this, we expect the Australian dollar to lift to 70 US¢ by end 2024.
The RBA Board left the cash rate on hold at its late March meeting, at 4.35%. The accompanying decision statement, the Governor’s press conference and the minutes from the March meeting, communicated a shift in the Boards’ thinking. At the March meeting, it seems that policy actions other than keeping rates unchanged were not on the table. The RBA is on hold, with the current level of the cash rate assessed as being just right, at least for the time being. The Board is giving itself maximum flexibility, “not ruling anything in or out”. If events surprise, then the Board will respond accordingly. In our assessment, September remains the likely timing of the initial rate cut. By then, the Board will likely have enough assurance that inflation will continue to decline on the desired trajectory.
Australia: Australia’s economy is expected to expand by a subdued 1.6% in 2024, then recover to an around–trend pace of 2.5% for 2025. Notably, growth slowed from a 2% annualised pace over the first half of 2023 to a tepid 1% pace over the second half. It is expected to edge up to a 1.3% pace over the first half of this year before recovering to a 2% pace over the second half of 2024, supported by less restrictive policy settings. Recall that in the December quarter 2023, domestic demand was particular soft, inching 0.1% higher, all of which was due to a lift in public demand. Much of 2023’s weakness stemmed from the household sector. The triple squeeze on household incomes from a rising cost of living, increasing tax take and higher interest rates required households to respond, to rein in their spending. There is light at the end of the tunnel for households – with the triple squeeze to ease, particularly from mid–year, as is appropriate. Inflation is moderating, Stage 3 income tax cuts commence on 1 July and interest rate cuts are ahead.
Commodities: Falling coal and iron ore prices drove our commodities index down 4% since our last report. However, this is masking solid price gains experienced by some base metals and crude oil, both of which are facing meaningful supply constraints. Copper rallied as negative fundamentals fade and mine production disappoints, a negative for the supply outlook and so a positive for prices.
Global FX markets: The US dollar has, once again, held to a tight range this month as market participants continued to trust in US growth momentum and remained hesitant to call an end to inflation risks. Still the data continues to point to success for the FOMC and other major central banks, and consequently an outlook that favours risk currencies over the US dollar. The run to the first cut by both the FOMC and ECB, which we continue to see occurring in June, is likely to herald the beginning of the next leg lower for the US dollar.
New Zealand: The New Zealand economy has contracted in four of the last five quarters, with weakness in activity continuing in the early part of 2024. That slowdown has moved the economy into a position of better balance, with inflation dropping back. However, the easing in inflation looks set to be more gradual than the RBNZ expects, including persistence in domestic inflation pressures. As a result, the start of rate cuts remains some way off.
United States: March’s FOMC meeting highlighted the confidence the Committee has in activity growth, but also in the return of inflation to target. While disinflation from here will potentially be a little slower, as the risks around both current and anticipated inflation are abating, the FOMC will soon be able to throttle back on the restrictiveness of policy. Still, we expect the FOMC will have to keep policy modestly restrictive into the medium-term owing to capacity constraints, alongside ongoing fiscal policy expansion.
China: As the new lunar year proceeds, the foundation for activity growth rests heavily on business investment and trade, as was the case through 2020–2023. However, increasingly there is evidence of greater resilience amongst households and nascent opportunities for employment and income gains. It is important to remember that Chinese consumption is not ever driven directly by fiscal support. Instead, gains in household spending come indirectly, as a result of growth in the industrial sector and the income it creates. The shape of further policy support will therefore be crucial.
Asia: India’s robust economic growth has been fuelled by investment. Future growth can be supported by credit growth facilitated by non–banking financial companies (NBFCs) catering to underserved segments. Credit penetration is low compared to global standards and credit expansion, particularly in sectors like micro and small businesses, presents opportunities for India’s growth.
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