Weekly recap
What happened in markets
The Australian sharemarket dropped 1.0% over the course of last week, as it broke a three-week winning streak. The past week saw a shift out of the Materials sector (5.8%), as the price of iron ore fell to its lowest point since November 2022. Conversely, the Financials sector (2.6%) gained, while the Information Technology sector added 1.0%. Last week, Australia’s Gross Domestic Product was released and saw slowing growth for the June quarter (0.2%), while it increased 1.0% for the 2023-24 Financial Year. This was due to consumers tightening their spending further, as they continued to be impacted by increased interest rates. As a result, household spending fell 0.2% over the quarter as spending on many discretionary items fell during the period.
US sharemarkets were also lower last week, as the S&P 500 (-3.3%), NASDAQ (-5.4%) and the Dow Jones (-2.5%) all lost ground. The Information Technology sector was the main laggard over the course of the week, as it conceded 6.1%. Last week also saw the release of ‘soft’ US manufacturing data, which missed economists’ expectations and remained in contraction territory for the month of August.
European sharemarkets finished last week in negative territory, as the STOXX Europe 600 (-3.5%) and the FTSE 100 (-2.3%) both dropped. This came due to concerns over a potential global growth slowdown following weak economic data out of the US. Losses were seen in the Automobiles and Parts sector, as it lost 5.2%, while the Basic Resources (-6.7%) also fell following a selloff in iron ore. The Oil & Gas sector (-5.4%) also weakened on demand concerns, as price of oil fell below US$70 per barrel for the first time since December 2023.
Stock & sector movements
What caught our eye
Last week we received updated economic data showing continued weakness and an ongoing per capita recession in Australia. Our inflation adjusted Gross Domestic Product (GDP) growth for the June 2024 quarter came in at just 0.2%, representing a 1.0% increase year-on-year. The result was lower than estimated by the market and remained well below trend. Interestingly, we have not experienced this sort of slowdown since the early 1990’s (if we exclude the worst of COVID-19).
Looking through the result, we saw that private demand growth has been largely non-existent. Household consumption fell and has now contracted on a per person basis over the last two years. This has been caused by the deterioration of people’s disposable income, adjusted to new higher price levels in the economy. Meanwhile, business investment and residential construction has also been weaker.
These conditions seem contradictory when we consider that price growth in the economy, known as inflation, has remained stubbornly above where the Reserve Bank of Australia (RBA) would like it. This is all despite an unprecedented amount of interest rate hikes and a commonly cited cost of living crisis.
That is until we look at the public side of aggregate demand, where recurrent Government spending was 4.7% higher over the year. According to the Australian Bureau of Statistics, Government employee expenses across most states and territories have increased, while health services expenditure at the federal level also rose (e.g., via programs such as the NDIS). Meanwhile, public investment in areas like infrastructure were slightly lower year-on-year, but levels remain elevated compared to historical standards.
Another interesting takeaway from the data was that Government expenditure as a proportion of total GDP was the largest on record (outside of the pandemic period) at 26.8%! This supported Treasurer Jim Chalmer’s claim that the result would have been much worse if not for Government spending growth. While this may be true, Chalmers got into some hot water in the days around the release for his suggestion the RBA was to blame for the “smashed economy” due to higher interest rates. The politicised shift of blame triggered many to point out that the RBA is doing its job to reduce inflation, and that expansionary fiscal policy from the Government was actually hindering its ability to bring inflation down to the 2-3% target range. Case in point, the RBA’s projected annual public demand growth for the December 2024 quarter jumped from 1.5% to 4.3% in its August Statement of Monetary Policy.
Unfortunately, this lack of coordination between fiscal and monetary policy may mean an unnecessarily prolonged period of higher inflation and interest rates. With the Government hitting the accelerator at the same time the RBA is hitting the brake, it’s no wonder the economy is stalling.
The week ahead
While it is a quieter week for Australian economic data, all eyes will be on the US, where the Consumer Price Index will be released. It is anticipated the annual growth rate will remain steady at 3.2%, while the Core CPI will lift 0.2% for the month of August.
In Europe, investors prepare for the release of the European Central Banks interest rate decision, where economists forecast a 0.25% cut to the key policy rates due to slowing economic growth.
