Westpac Market Outlook June 2024
Our latest thinking on Australia, markets and the global economy.
Read full report 'Westpac Market Outlook June 2024' (PDF 958KB)
The global monetary easing cycle has finally begun, albeit in a fairly limited and tentative way. The last month has seen both the ECB and Bank of Canada reduce policy rates by 25bps. The FOMC is widely expected to follow in coming months albeit with lingering uncertainty around inflation and growth still making it hard to pinpoint the timing. Inflation is now fundamentally lower, the main question for policy being around the confidence central banks have that it will make a sustained move back to targets over reasonable time frames. Economies are showing varied impacts from policy tightening, most recording slower growth. The US is the main exception here, although we continue to note the wide divergence between different measures of labour market conditions. There are other variations on this general theme as well. In Japan, policy-makers are looking to use the recent inflation burst to end its multi-decade problems with recurring deflation and demand weakness. For China, inflation challenges are minimal compared to the housing and trade-related issues although we remain relatively comfortable that it can deal with these and maintain growth. Australia and New Zealand are still some way from having a more confident view on the move to lower inflation. Both are facing an uncertain situation around productivity that could add a domestic aspect to inflation that takes longer to address. However, both are still expected to be firmly in the easing cycle club by this time next year.
Australia: Updates over the last month confirm weak economic activity has carried into the new year but suggest a ‘soft landing’ still point to a ‘soft landing’. GDP growth is expected to lift from 1.1%yr in Q1 to 1.6%yr by the end of 2024 and 2.3%yr by the end of 2025. Recent weakness continues to centre on the household sector, consumers having now cut per capita spending for five consecutive quarters in response to a ‘triple squeeze’ on disposable income from rising living costs, higher interest rates and an increasing tax take. Income dynamics are starting to improve as inflation subsides, and will get added support from fiscal relief in coming months an eventual easing in interest rates expected from November. However, the recovery is expected to be only gradual.
Commodities: The last month has seen a broad-based softening of commodities outside of met coal and LNG. This issue we continue our exploration of the base metals market, with a view to understanding their role in the transition to a low carbon economy. We focus more specficically on alumina, the raw material for aluminium (accounting for 30-40% of the primary cost of aluminium production). Here, constrained Chinese production, and rising demand look set to see prices remain elevated and volatile.
Global FX markets: The US dollar has held to an exceptionally tight range this month as multiple US rate cuts remain on the horizon, but are not yet imminent. Rate cuts have begun in the Euro Area and Canada, and are anticipated soon in the UK. They are also likely to be of a similar scale for the US cycle by end 2025. Growth in each jurisdiction is also expected to normalise around trend. So, while we see the US dollar trending lower over the forecast horizon, into 2026 the currency is set to remain above its pre-pandemic average.
New Zealand: The economy remains moribund despite the boost from population growth. Even so, following the March quarter inflation reading, the RBNZ has grown more pessimistic about the inflation outlook. With annual inflation now not expected to return to the target midpoint until 2026, the RBNZ has further pushed out the timing of when it expects to begin easing policy until the second half of next year. Meanwhile, the Budget confirmed that fiscal policy will be less restrictive in the near-term than signalled previously.
United States: Inflation risks continue to subside, albeit slowly. Thankfully for the FOMC, the economy remains in robust shape, allowing time for inflation to come back to target with little cost. We expect this status quo to remain in place in coming months, with the downside risks pointed to by some business surveys to be offset by easing from late-2024. Longer-term, supply-side capacity constraints and trade policy are expected to hold inflation modestly above target, requiring policy to remain restrictive, to a degree.
China: Concern over the nation’s economic outlook continues to subside, yet market participants remain cautious on aggregate momentum, particularly the health of the consumer. The new tariffs introduced by the US this month will have a negligible impact on the current trade surplus with the US, but they do highlight (again) that China will have to look to offshore production and licencing arrangements to continue benefiting from US growth. These opportunities are secondary to those in Asia and emerging markets.
Japan: While cautious about rapid Yen depreciation, the Bank of Japan is less worried about sustained weakness. A weak Yen supports cost-push inflation and shifts inflation expectations. The normalisation of robust price increases also supports investment in capacity and wage gains. Only when expectations are fully reset and inflation consistently at or above target will the BoJ be justified in lifting the policy rate materially above the lower bound.
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