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Australian economy

With a new government at the reins, Australia's economy is in a precarious position. Whilst unemployment is at all-time lows and the economy has bounced back well from its two covid contractions, the deep ramifications of a global pandemic and major war are starting to be keenly felt through rising prices. This is starting to be reflected in both consumer and business confidence levels, with these measures dropping considerably since the beginning of the year¹. 

International economy

A large drop in the US economy in the first quarter of 2022 was confirmed in May, with a few other countries also showing signs of contraction (including Japan and France). The large and sustained jump in inflation in the US and Europe, however, is of most concern to central authorities, economists and investors. In China, pandemic and debt fears are continuing to keep a strangle hold on the economy, with the most recent industrial production measure out of Beijing showing a drop of almost 3% in just one month¹. 

Investment Markets

Given the macroeconomic backdrop in May, most equity markets performed relatively well. Asian markets led the way, up around 1% for the month, whilst US and European equities were mainly flat. Australian equities, on the other hand, suffered significant reversal, down almost 7% for the month².

Outlook

The current interest rate hiking cycle is now expected to be a little more sharp, owing to the persistently high growth in consumer prices over the past year. This is also being reflected in longer-term bond yields and mortgage rates, with the latter expected to lead to increasing defaults across the globe and a correction in property prices.

S&P/ASX200 - 12 months to 31 May 2022