At the inaugural Australian Wealth Management Summit, AMP’s chief economist Shane Oliver noted that while economic growth has already begun to slow slightly, inflation is expected to continue its decline, albeit with a slightly stickier trajectory than initially anticipated.
Addressing a room filled with wealth management professionals, Oliver emphasised the clear downward trend in inflation, which has decreased from around 8 per cent a couple of years ago to the current 3.5 per cent. He acknowledged that while the final portion of this decline is proving more challenging, he expressed confidence that “we are moving in the right direction”.
Oliver anticipates that the European Central Bank will lead the way with rate cuts, forecasting a move in June, followed by the Federal Reserve in September, and ultimately the Reserve Bank later this year.
“That ultimately will boost growth in 2025,” Oliver said.
Regarding the implications for share markets, the chief economist stated that it will undoubtedly be “a rougher ride than what we experienced from October 2023 to March this year”.
“Aussie shares rose by something like 17–18 per cent, global shares rose something like 25–30 per cent, with the US shooting the lights out with its AI exposure.
“So, it is going to be rougher and more constrained than that, but I think the broad picture for shares will still be up. What you want to keep an eye on obviously includes inflation, interest rates, issues around China and geopolitics, and there is a big event coming up later this year with the presidential election in the US.”
Oliver cautioned against relying on “persistently low interest rates and continuously decreasing inflation” after both reached around 0 per cent some four years ago. He noted that the favourable conditions have ended, resulting in returns being somewhat more limited compared to the past 30–40 years.
Returning to key economic markets, Oliver said that while the March quarter inflation data did surprise to the upside, “inflation is falling”. On employment, he said that while the labour market has been tight, the number of job vacancies is decreasing.
“Yes, we still have low unemployment, but less vacancies also mean less bargaining power for workers in terms of wages growth, which I think ultimately will remove some of those concerns about a wage price spiral,” Oliver said.
“Bottom line is, I think we’re in a situation where central banks have done enough, inflation will come down, they will start cutting interest rates as I mentioned earlier, then of course the risk will become, well maybe they’ve too much.”
On this last point, Oliver said it’s a scenario that can’t be ruled out.
“That is a risk that we’ve already tightened enough and we could be in for a much rougher ride ahead,” the chief economist said, emphasising that AMP’s base case is that Australia will manage to steer clear of a recession.
“I am not going to rule it out, it is a high risk but I think it’s not the most likely scenario.”
Ultimately, Oliver believes there are five reasons for optimism, including:
- Inflation has rolled over, without recession, and productivity growth is picking up.
- Interest rates are at or close to peaking.
- Economic growth has so far proven “relatively resilient”.
- In Australia, the budget is back in surplus and export earnings remain high.
- Any recession is likely to be mild reflecting a lack of overinvestment or over consumption that needs to be unwound.
How will assets fair?
Sharing his view on major asset classes over the next 12 months, Oliver noted that cash returns are currently increasing but are expected to slow down due to anticipated rate cuts. Regarding bonds, he expects returns to align with running yield or slightly surpass it, with potential volatility compared to the previous year.
Shares, he said, should see “OK returns” but with “a bit more” volatility than experienced last year. Company profits are largely expected to keep markets going with strong earnings growth predicted.
Turning to property, Oliver predicted modest gains with the housing market caught between “two opposing forces” – shortages pointing up, but higher interest rates for longer pointing to further weaknesses.
On the Australian dollar, Oliver said it should see a rising trend on a 12-month view.
“I think it probably goes higher because we are now into another super cycle on commodities. Why is that?
“We’ve got more defence spending because of geopolitical issues, and of course we’ve got the transition to clean energy which means more demand for a whole bunch of metals. So Aussie ultimately, I think goes higher.”
