Monthly Economic Commentary

The global economy is forecast to gain momentum over the coming year. In its latest report (October), the International Monetary Fund (IMF) is forecasting global growth to pick up from 3.1% this year to 3.4% in 2027. In the IMF’s words, ‘despite a barrage of shocks’ over the last seven years, including ‘the pandemic and ensuing disruptions to global supply chains, the wars in Ukraine and the Middle East, with consequent sharp increases in the prices of energy and other commodities, and significant changes in trade barriers…the global economy has held up’. Key reasons for this solid outcome have been ‘a rerouting of energy supplies and increased energy production in other countries’, as well as ‘the investment boom triggered by artificial intelligence’, while ‘the pass-through to core inflation (from higher commodity prices) is expected to be limited’. The IMF adds though that ‘fiscal policy (government spending) must be constrained’.

In the case of the US, the annual growth rate was 2.1% in the June quarter, with the IMF forecasting growth of 2.3% for this year and for 2027, although the US administration is aiming for a higher rate of growth than this through reduced taxes and regulation and incentives for investment. The annual inflation rate reached its highest level in 3 years in May (4.2%), due to a rise in oil prices, but subsequently declined (it was 3.7% in September). While the central bank raised interest rates at its September meeting (to 3.75% to 4.0%), it refrained from a further rate rise in October. Growth for the euro zone is forecast to remain weak (1.1% this year and 1.2% in 2027), while Japan is forecast to grow by only 0.7% this year and in 2027.

The Australian economy grew by 0.4% in the June quarter and by 2.1% over the year. On a per capita basis, growth was flat over the quarter and has now not grown for 12 of the last 16 quarters. Growth could slip lower over coming months due to the Reserve Bank (RBA) having tightened monetary policy by raising its ‘cash rate’ four times this year in response to rising inflation. After the annual headline rate rose to 4.3% in September (with a ‘trimmed mean’ rate of 3.6%), the RBA appears likely to raise rates again in the near-term, raising the prospect of the economy weakening even further over coming months.

Most share markets were on a broadly upwards trend from April last year until the end of February this year, largely due to declining interest rates in most of the major economies. However, with the outbreak of the Iran war, most markets fell heavily in March before beginning to rise again in April. This year, up to 29 October, overall market movements have included rises of 13% for the broad US market (S&P500), 13% for the technology-focused Nasdaq, 8% for the UK and a hefty 28% for Japan. Most European markets were softer (Germany was up 6% and France was down 2%), while India fell 13% and the Australian market rose 2%.

Major sovereign bond markets have been volatile for some time, with yields (interest rates) rising and falling in line with the outlook for inflation. The US 10-year Treasury bond yield was pushed down to a record low of 0.54% on 9 March 2020 (by ‘QE’) but rose to 5.0% in October 2023. More recently it peaked at 5.31% on 5 October this year before falling back to 4.98% on 29 October. The Australian 10-year bond yield was 0.57% on 8 March 2020 but reached 5.41% on 7 October this year before declining to a still elevated 5.18% on 29 October. Bond yields could move lower (and prices rise) over coming months if inflation declines.

Fiducian’s diversified funds are currently above benchmark for international shares and under benchmark for domestic shares and listed property. Exposure to bond markets is close to benchmark, while cash holdings remain below benchmark.

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