Investment markets and key developments

• A downgrade to projected GDP growth for the next 40 years to 2.2%pa compared to the last IGR in 2021 of 2.6%pa, mainly due to assumed lower productivity growth of 1.2%pa rather than 1.5%pa. This reflects the reality of the slowdown in productivity growth in recent times.
• Improved budget projections since the last IGR due to a better starting point (with the strong economic recovery and high commodity prices driving a budget surplus last financial year) but a renewed deterioration in the decades ahead as spending pressures mount. This results in somewhat improved but still high public debt projections.
• Key spending pressures are the NDIS, aged care, interest payments, health and defence. A key driver of growth in aged care and health spending is the aging of the population which is projected to see the share of the population aged 65 and over rise from 12% now to 18% in 40 years’ time.
• This is projected to push government spending as a share of GDP from 24.8% in 2022-23 to 28.6% in 40 years’ time which is well above its pre-pandemic average. All things equal, a bigger government share of GDP means a less productive economy.
• A falling reliance on indirect tax (with falling fuel & tobacco excise) and rising reliance on personal income tax collections (partly reflecting bracket creep). The increased tax burden placed on workers will further reduce the efficiency of the tax system and raised questions of equity.
• The IGR also assumes that long term bond yields rise to around the level of nominal GDP growth of 4.6%pa over the long term. Since long term bond yields reflect expectations of the RBA’s cash rate over time this provides a reminder that over the long term, interest rates and hence mortgage rates are likely to be higher than they were in the years up until the pandemic. This will be a source of downwards pressure on property values.

The challenges of an aging population have long been a theme of IGRs over the last 20 years and so are nothing new, but the decline in productivity growth is a big concern as it means slower growth in living standards. It may seem academic and hard to comprehend, but the now projected 1.2%pa growth in productivity will mean that GDP per person in 40 years’ time will be 11.2% lower than if productivity ran at the previous projected level of 1.5%pa. If productivity growth is in line with the average of the last decade of just 0.8%pa, per capita GDP will be 24.2% lower than otherwise in 40 years’ time. While the Government is focussing on things like skills, the opportunities that flow from the move to net zero, supporting the adoption of new technology and now competition policy, much more needs to be done in terms of tax reform (with Australia set to rely even more on distortionary income tax v indirect tax), labour market flexibility and improving public sector productivity.

Finally on the IGR, this next chart highlights the better budget position versus the last IGR in 2021 but also why the projections need to be treated with a lot of caution as they blow around a lot with each new IGR!


Source: Australian Treasury

Economic activity trackers

Our Economic Activity Trackers are still not providing any decisive indication of recession (or a growth rebound).


Levels are not really comparable across countries. Based on weekly data for eg job ads, restaurant bookings, confidence, credit & debit card transactions and hotel bookings. Source: AMP

Major global economic events and implications

Goldilocks rapidly fading! Business conditions PMIs fell again in August in the US, Eurozone, UK and Australia with services conditions now rapidly catching down to manufacturing, that was already in negative territory. Japan is the exception reflecting its later reopening and absence of monetary tightening so far. But the global rebound from late last year is clearly over as rate hikes globally continue to impact highlighting that the risk of recession remains very high.


Source: Bloomberg, AMP

With the downswing in business conditions, pricing pressures are well down from their 2021-22 highs and are continuing to recede. Input prices across the G3 (US, Europe and Japan) rose in August reflecting a rise in oil and gas prices, but output prices slipped slightly, order backlogs are well down from their 2021-22 highs and delivery times remain much improved which is all consistent with an ongoing easing in inflationary pressures albeit there is still a way to go yet. The ongoing signs of weakening economic conditions and easing price pressures are consistent with the Fed and ECB leaving interest rates on hold at their September meetings, albeit the threat of more hikes from both will likely remain on the table for a while yet.


Source: Bloomberg, AMP

Apart from the weak PMI’s other US economic data was mostly soft too. Jobless claims fell and new home sales rose in July, but existing home sales fell as did new mortgage applications which suggests that the renewed rise in US mortgage rates is starting to weigh on US housing indicators again. Underlying capital goods orders and shipments for July were also soft pointing to weak business investment. 

German producer prices fell 6% over the year to July, down from a high of +45%yoy in producer price inflation last year. While higher gas prices will boost producer prices this month note that the gas price is still way down on last year’s high.

Another modest PBOC easing. The Chinese central bank eased monetary policy further – cutting its 1-year prime rate by 0.1% to 3.45% - but this was by less than expected and it left its 5-year prime lending rate unchanged at 5.2%. Both of these impact bank lending rates and the continuing modest nature of policy easing remains a concern. However, if China’s problem is that borrowers don’t want to borrow more (because of property problems etc) then cutting rates may not make a big difference any way and the Government may just be waiting for a better opportunity to provide more forceful fiscal stimulus. Given the risk of social unrest if the economy continues to slow and the property market weakens further, it’s hard to see the Chinese Government not providing more aggressive stimulus at some point soon. 

Australian economic events and implications

Australian business conditions PMIs for August fell again taking the composite index further below the 50 growth/contraction level with a sharp fall in services conditions.Price and cost pressures edged down a bit and are well down from their highs but still remain elevated, but at least they are not as concerning as in the July NAB business survey. Order backlogs are continuing to improve.


Source: Bloomberg, AMP

New home sales as surveyed by the Housing Industry Association remain depressed with the 3-month average to July running down 33%yoy, consistent with depressed building approvals in pointing to slower home building activity ahead.

The Australian June half earnings reporting season is now about 85% done in terms of companies and 92% done in terms of market capitalisation. It’s been a better than feared but expectations are still getting revised down on the back of cautious corporate guidance. 

• Upside and downside surprises have been neck and neck with about 36% surprising on the upside which is below the norm of 43% and 36% surprising on the downside which is more than the norm of 26%.

Source: AMP

• 58% of companies have seen earnings rise on a year ago, but this is below the norm of 63%. 
• Only 43% have increased their dividends on a year ago which is less than the norm of 58%, suggesting a degree of caution.

Source: AMP

• And less companies than normal have seen their share price outperform the market on the day they reported.

Source: AMP

Key themes from the earnings results have been that: cost pressures remain a challenge although there are some signs they are easing; building material companies are still benefitting from strong activity although some are warning of a slowdown; insurers are seeing margin improvement (at the expense of their customers with big premium increases); so far home borrowers are keeping up their payments (but rate hikes have yet to fully flow through); and corporate guidance has been cautious with more negative than positive guidance and retailers in particular are warning of tougher conditions and better off customers turning to discount stores (like Big W and K Mart) for bargains. Partly reflecting the cautious outlook guidance consensus earnings expectations have been revised down since the reporting season started. The consensus is now for a +1.5% rise in earnings for 2022-23 and for a -5.7% fall in earnings in 2023-24, with both revised down from +2.5% and -0.8% respectively at the end of July.

What to watch over the next week?

Outlook for investment markets

Shane Oliver, Head of Investment Strategy & Chief Economist
AMP Capital

THIS ARTICLE WAS RELEASED BY AMP CAPITAL 25 AUGUST 2023, FOR MORE AMP CAPITAL UPDATES GO TO WWW.AMPCAPITAL.COM.AU

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