28 Mar 2023
1. What is your view of Australia potentially going into a recession or even a depression?
An Australian recession is possible given the significant tightening in monetary policy we’ve seen in the last 12 months. The Reserve Bank of Australia is forecasting anemic economic growth for the next 12 months, so it wouldn’t take a lot from here to tip us into a shallow recession.
Whilst we are a lucky country, benefiting from both commodities and agriculture, we are also an export-led economy that needs our trading partners to be healthy.
As higher mortgage costs and energy costs hit home, consumption will slow over the next 6-12 months further impacting the economic growth outlook.
2. What is your forecast for the economy in the next couple of years and what sectors of the economy will benefit, or be disadvantaged?
We agree with the Reserve Bank's forecast for lower economic growth in the period ahead given the significant tightening of financial conditions already seen. Without knowing how fast inflation falls from here, it’s difficult to know what the central bank policy path will look like, hence identifying which parts of the economy will benefit or be disadvantaged, is difficult at this point in the cycle.
The historical underinvestment in new commodity and energy supply is likely to provide a tailwind for these sectors over the medium to long-term but may come under pressure in the short- term as the economic backdrop weakens.
The inbound tourism and education sectors have yet to fully recover to their pre-covid levels so these could benefit in short to medium term, particularly with a lower Australian dollar and the reopening of China.
3. With the RBA raising rates, and Term Deposits now on offer for 4%, should we consider moving funds back into these, and out of other assets that don’t have this same certainty?
The timing isn’t necessarily right to shift assets from things like equities and bonds to term deposits. However, assuming a well-diversified portfolio aligned to an investor’s risk profile, we do think investors should opportunistically consider higher yields on offer from term deposits for any “lazy” cash or cash not requiring liquidity in the immediate term.
4. Given the growth of India, what are the factors that inhibit them from being as strong as a trading partner as China?
India could be a great trading partner given the size of their population, impressive demographics, and their future economic growth trajectory . However, it’s hard to compare India with our largest trading partner China even though they do share some similarities.
The biggest difference is their political structure. India is a democracy and China is communist. In China, the central authority - the Chinese Communist Party, has the complete ability to organise, mobilise, and control all investment and trade output, giving them greater coordinated buying power.
However, India's demographics are now vastly superior given the damage done by China’s one-child-policy. India is becoming more open to foreign investment (have been historically slow on this front) and, they have a wider range of countries now looking to do business with them. It will take time for India to become a strong trading partner. Trade and trade relationships are developed over decades, not months or years.
As always, if you have any questions or your personal circumstances have changed please do not hesitate to contact your financial adviser.
General Advice Warning - Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation or needs.
