Financial year ends with global economy in good shape
Highlights
- Positive outlook as upswing continues
- Trade tensions spark risk-averse sentiment
The global economic outlook remains positive as the upswing that began in mid-2016 continues to strengthen. Across the globe, the level of investment continues to increase, supported by the low interest rate policies of most central banks and more recently, increased spending by governments.
In Australia, economic growth during the first quarter was higher than expected, supported by solid export growth. Wages continued to grow at a slow but steady pace, and ongoing government spending supported economic activity.
US trade policies create tension
Trade tensions were a focus during the month as the US announced tariffs on imports from China, Canada, Mexico and the European Union, and the targeted economies responded with reciprocal tariffs on US imports. US President Donald Trump also discussed the possibility of tariffs on imported cars and auto parts. Such a move could be detrimental for the European and Japanese car industries and particularly Canada because its auto parts industry is more highly integrated with the US.
During the 2008 global financial crisis, central banks acted swiftly to stabilise financial markets and support economic activity by providing liquidity and lowering interest rates. Now that the global financial system is more resilient and the global economy is recovering, central banks are gradually withdrawing this liquidity and raising interest rates to more ‘normal’ pre-GFC levels.
Monetary policy returning to ‘normal’
During June, the US Federal Reserve raised interest rates for the second time this year, and the European Central Bank announced it would reduce the stimulus provided to financial markets.
Locally, the Reserve Bank left the cash rate unchanged at 1.5%, indicating an accommodative monetary policy that continues to support the domestic economy.
Concerns over US trade policies contributed to the market’s more risk-averse sentiment, and bond markets rallied as investors moved into safer assets. The safe-haven US dollar strengthened during the month, while the currencies of three commodity-centric economies (Australia, New Zealand, and Canada) weakened.
In commodity markets, iron ore and coal prices climbed higher during the month, and geopolitical tensions surrounding developments in Iran, along with limited supply, pushed oil prices higher.
Stronger US dollar hits emerging market borrowers
Emerging markets’ reliance on exports makes them vulnerable to trade tensions. They are also exposed when the US dollar rises because it increases debt held in US dollars. These factors contributed to weaker performance by emerging share markets during the month, while developed market shares were generally flat. The US delivered small positive returns, as companies continued to benefit from the recently passed tax reforms, while European shares declined due to concerns over trade.
Australian shares performed well in June, with the ASX 200 up 3%. Resources were up 3.3% thanks to rising commodity prices, while Industrials were up 3%. Energy stocks climbed 7% on the back of the weaker $A and higher energy prices.
Extract from Reserve Bank media release
3 July 2018
The global economic expansion is continuing. A number of advanced economies are growing at an above-trend rate and unemployment is low. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States. There have also been strains in a few emerging market economies, largely for country-specific reasons. Low interest rates continue to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this is likely to be gradual.
Investment commentary
Past performance is not a reliable indicator of future performance. This information has been prepared by First State Super Investments on behalf of FSS Trustee Corporation ABN 11 118 202 672 AFSL 293340, trustee of the First State Superannuation Scheme ABN 53 226 460 365.
