With a recession on the cards across a number of major economies worldwide, VanEck has predicted that Australia will likely remain the “lucky country” this year.
In its latest quarterly outlook, VanEck stated that a great paradigm shift is currently underway with central bank tightening expected to have significant impacts.
“While Australia faces some significant risks, China’s policy shift away from COVID zero and the RBA getting a significant amount of tightening in before wages had a chance to take off both mean it’s possible Australia could avoid a recession,” the firm said.
VanEck noted that wage measures in Australia are “not great”, with the broadest measure of labour cost, compensation of employees, up 3.2 per cent in the third quarter of last year.
“If China can pick up pace and Australia can skirt a property/credit implosion, the Australian dollar could do well, particularly against a sliding US dollar. An easing of China trade sanctions would be icing on the cake,” the firm added.
While the housing market and consumer sentiment look to be slightly more stable, VanEck pointed out that the impact of rate rises has yet to fully hit households.
The firm said that this full impact of rising rates will be further exacerbated by fixed-rate mortgages rolling off and being replaced by much higher floating rates.
“The RBA estimates that surging mortgage repayments will see around 40 per cent of households’ spare cash flows drop by 40 per cent or more. Up to 15 per cent of households will see spare cash flows turn negative,” VanEck explained.
“At the same time, falling real wages, the dark side of moderate wages growth in the face of soaring inflation looks to be exhausting COVID savings. In Q3, the household savings ratio dropped back to 6.9 per cent, in the ballpark of [pre-COVID-19] levels.”
Based on this, VanEck suggested that the RBA looks likely to be on pause, potentially throughout the first quarter of the year.
“Whether it resumes tightening or not depends on whether households are overcooked or not,” the firm noted.
“We hope there’s more to do. The alternative is a recession. It will be a tight landing, but that’s the cost of holding rates down too long, then having to play catch-up.”
VanEck also predicted that the Australian share market should continue outperforming the US throughout this year, as major resources companies like BHP, Rio Tinto and Woodside benefit from relatively high commodity prices and China’s reopening.
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.