IT’S almost a year to the day since NSW and Victoria exited lockdowns.
NSW premier Dominic Perrottet declared “freedom day” on October 11 last year as millions of Australians celebrated at pubs and restaurants in Sydney and Melbourne.
Today’s headlines couldn’t be further from that optimism. Recession. Inflation. Strikes. Oil prices. War.
A stream of bad news has led to near-historic lows in consumer confidence.
With central banks unusually coordinated in rapid-fire rate hikes, it’s reasonable to be concerned.
RBA deputy governor Michelle Bullock’s speech yesterday was a timely reminder of the central bank’s objectives: currency stability, full employment and the welfare of the people of Australia.
That differs from the US Federal Reserve’s dual mandate of price stability and maximum sustainable employment.
Welfare of the people. A small but important difference.
This objective influenced the RBA’s discussions, leading to an earlier slowdown in rate hikes this month.
Recessions bring a real human toll that can lead to a prolonged economic slowdown.
Research has shown that people out of work for extended periods become so disconnected from labour markets, that they struggle to find jobs even after the economy has recovered.
The effects of recession on labour force shrinkage is evident in Europe and the US. Participation rates in the US have barely budged despite some of the tightest labour market conditions on record.
In Australia the belt-tightening has started with consumer goods spending growth flat-lining in 2022.
In the RBA’s latest Financial Stability Review, the Reserve Bank stress-tested the impact of a 3.6% cash rate target. About 40% of people would experience a -20% to 0% reduction in cash flows, with almost 15% going into negative cash flows.
The psychological impact of watching savings buffers evaporate would likely increase the pace of decline in consumer spending as rates increased.
The peak rate could very well be lower than the market pricing of 3.6%.
Markets will remain choppy with upcoming CPI releases.
As consumers head into the first fully open Christmas in three years, many will travel to visit families they have not seen in years.
Anyone booking travel will be aware of the high prices of airfares, particularly across the Tasman.
These will feed into CPI – as possibly a last hurrah before belt-tightening in 2023.
Find out about
Pendal’s Income and Fixed Interest funds
Anna Hong is an assistant portfolio manager with Pendal’s Income and Fixed Interest team.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.
With the goal of building the most defensive line of funds in Australia, the team oversees A$22 billion invested across income, composite, pure alpha, global and Australian government strategies.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
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