After Australia’s strong fiscal and monetary response saw the country emerge from the pandemic relatively well, new analysis by BlackRock has outlined the top challenges and opportunities that lay ahead.
With higher inflation amid a slowing global economy, local policymakers are facing a challenging near-term economic path, according to Ron Montgomery, portfolio manager within BlackRock’s multi-asset strategies and solutions group, and Ben Powell, chief investment strategist at the BlackRock Investment Institute.
“The Reserve Bank of Australia, like its peers in other developed economies, is confronted by a difficult policy trade-off, in our view, between choking off growth via sharply higher rates or living with supply-driven inflation,” they said.
“The outlook for the economy and domestic markets depends on three key factors: the post-pandemic restart and policy response to inflation, the impact on consumption from higher interest rates hitting heavily indebted households, and continuing impact from China’s ongoing COVID-related slowdown.”
Mr Montgomery and Mr Powell suggested that the effect of higher interest rates on consumer sentiment and spending was one risk worth monitoring.
They noted that consumer sentiment in Australia has already fallen to its lowest levels since August 2020, while Australian households rank as some of the most indebted in the world primarily due to the purchase of residential property.
“Unlike many countries following the Great Financial Crisis, Australian households never really deleveraged to any extent, and in each successive cycle to lower interest rates, have leveraged further into cheaper debt,” said Mr Montgomery and Mr Powell.
“Such leverage makes the prospective interest rate hikes that markets forecast quite aggressive, in our view.”
Lockdowns in China also pose a risk to the outlook, Mr Montgomery and Mr Powell said, with Australia among the biggest beneficiaries of the country’s growth in recent decades.
“In line with the global trend of greater geopolitical fragmentation, we believe Australia will also experience disruptions to global supply chains, a rethinking of alliances, and diversifying geographical dependencies which all point to an ongoing rewiring of globalisation that investors will have to account for in coming years,” they noted.
“For Australia, this would mean further diversifying its trade partners to drive its economy. Australian exports to China haven’t been adversely impacted yet but it is something we are closely monitoring.”
Over the near term, Mr Montgomery and Mr Powell said they remained cautious about the outlook for equities, but pointed to opportunities in the short end of the yield curve where they said the market could be pricing in too much monetary policy tightening.
“In relative terms, we find the long end of the Australian yield curve more attractive than other developed markets on account of recent underperformance and more aggressive front-end rate pricing. Longer term, we see Australia well positioned as a commodity exporter in a higher inflation regime,” they concluded.
Jon Bragg is a journalist for Momentum Media’s Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.