Janus Henderson has warned that a “shallow recession” is still on the cards in Australia as the full effects of the fastest monetary policy tightening cycle in decades continue to be felt.
In a recent economic analysis and market outlook, Emma Lawson, fixed interest strategist – macroeconomics in the Janus Henderson Australian fixed interest team, noted that the Reserve Bank of Australia (RBA) is balancing inflation risks against a weakening household sector.
Ms Lawson said that recent data represented “mixed news” in this regard. The monthly consumer price index (CPI) indicator rose by a lower-than-expected 4.9 per cent in July.
“The core measure remained sticky, with rent and energy costs rising strongly. Wages were solid, rising 3.6 per cent year-on-year although the big gains are expected in the third quarter, post the rise in award wages,” she said.
“Things aren’t so rosy on the household sector, with second quarter real retail sales falling 0.5 per cent quarter-on-quarter, the nominal monthly retail sales rose, buoyed by the World Cup, and difficult seasonality factors. The partial indicators suggest further weakness.”
Markets are pricing only a fraction of a rate hike by the RBA, Ms Lawson said, with a peak in the cash rate of 4.16 per cent in March next year and a rate cut not priced until late 2024.
“We currently see market pricing of less than one hike and easing in very late 2024 as underestimating the economic headwinds in 2024,” she suggested.
Janus Henderson has removed its own call for a final rate hike from its base case scenario, citing Australia’s moderating inflation data and the underlying data softening from solid levels.
“The RBA are clearly concerned about the impact of prior hikes on the household sector and are presently in wait and see mode. We see the RBA on hold until mid-2024 when they commence a modest easing cycle,” Ms Lawson said.
“We see a relatively small risk to the upside for the RBA from our baseline scenario. We have a modest tilt to the higher case of a peak in the cash rate of 4.35 per cent if services inflation persists. This is most likely to occur if productivity in the economy remains moribund.”
According to Ms Lawson, Australia’s central bank will be keeping an eye on the balance between the slowing household sector, the strong labour market, and high wages growth.
“We remain in the midst of the peaking of the economy but believe that policy will continue to grip and slow economic growth, with a shallow recession starting early next year not off the table. The RBA will now be monitoring the global economy closely for signs of faster-than-expected slowing.”
Ms Lawson indicated that Janus Henderson remains on the lookout for tactical opportunities to add further duration on spikes in yields triggered by central bank signalling and data flows.
Additionally, the firm’s strategy remains skewed towards high-quality, investment grade issuers with resilient business models, solid earnings power, and conservative balance sheets.
“While we believe that the cumulative impacts of tightening financial conditions will become evident, we remain open-minded to a wider range of potential economic outcomes that include scenarios less dire than ones revolving around deep recession,” Ms Lawson added.
Australia’s Q2 GDP data will be published in the national accounts on Wednesday.
