With the start of a new financial year, it’s the perfect time to reflect on the past year and look ahead to 2022/23.
We always expect to have some economic challenges and the past 12 months has certainly had more than its fair share! We started the year battling the ongoing complexity of Covid that has put pressure on production, staffing and supply chains across the world. As we started to see the cost of many goods climb, the war in Ukraine broke out which saw a rise in political instability across the globe and added further supply-chain challenges. This all came at a time when governments were scaling back many of the stimulatory measures implemented during the start of the pandemic.
As inflation figures began to rise sharply, central banks began a series of aggressive rate hikes that were needed to keep it in check. At home in Australia this marked the first time in over a decade that we have seen a rate hike with further increases still expected by economists in coming months. With inflation at 40-year highs, the move to increase interest rates is designed to get inflation under control and avoid a recession.
The Australian Economy
Overall, the Australian economy is in a good place to deal with these challenges. In the 2021 calendar year, the Australian economy grew by 4.8%, and 3.3% to March 2022, which was well above the normal 2.3% growth rate. As interest rates rise, we can expect to see that growth begin to slow, but with the jobless rate at just 3.9% and wage growth expected to rise, we are in a solid position to fare well.
The expectation is that inflation will continue to rise until the first quarter of 2023 before easing off. Unfortunately, this will mean the end to super-low interest rates for some time. We saw the RBA follow up the May 3 rate hike with a 0.5% increase to bring the official cash rate to 0.85%. It was the first-rate hike since 2010 and largest hike in 22 years. The RBA Governor believes the cash rate could go as high as 2.5%, but most economists are being slightly more generous with prediction of 2.1-2.35% over the 2022 calendar year.
We saw the Aussie dollar dip to US69cents, after reaching highs of US75cents at the start of the year. Despite the global economic fluctuations, we can be buoyed by the dollar remaining relatively stable over this time.
Australian companies are reporting record profits, so despite expectations of a sharemarket dip of 7-9% in 2022, economists are predicting a lift of 7-9% over the 2022/2023 year and a rise of 5-8% over the 2023 calendar year. We have seen growth in company profits as businesses have chosen to pass on rising costs to consumers. However, as inflation rises, companies will have to absorb some of these costs to remain competitive, so we can expect to see a dip in company earnings. The good news is that with cheaper valuations, attractive dividend yields and Australia’s likely economic performance, Aussie shares are expected to fare well.
As always, the advice during volatile times is to plan ahead, ride out the waves and be ready to pivot toward new opportunities
If you have any questions, please get in touch – the team at Apollo is always here to help.