The quest for a soft landing
Written and accurate as at: Jul 14, 2022 Current Stats & Facts
It may be hard to be optimistic among the doom and gloom of recent data releases. However, the prospect of soft-landing remains a distinct possibility. It can be achieved if Australia can curb consumer demand without damaging our GDP.
Grey Clouds
The week started with the CBA Household Spending Intentions, Westpac Consumer Sentiment and NAB Business Survey results. We have all apparently absorbed the messaging from the central banks around inflation and interest rates. Business confidence has fallen below long-term average levels from the record high in March ‘22. Consumer sentiment was no different – it was the seventh consecutive monthly fall. This is the longest streak of successive monthly drops since the beginning of the survey in 1974.
Silver Linings
Is there any good news? Yes.
Consumers are reducing their expenditures, easing the price pressures on consumer goods and services. The Household Spending Intentions data showed that Australians had reduced discretionary spending in June, with Retail expenditure, Entertainment and Home Buying all recording falls; Digital Streaming spending has also flatlined. This is exactly what rate rises is intended to encourage. However, as consumption remains the key component of GDP, the challenge will involve curbing consumer demand without damaging GDP.
Enter government spending.
Fiscal policy has proven to be the main game in the post-pandemic recovery and that will continue to play a key role. The current pipeline of capital expenditure for 2022/23 is expected to add 0.5% to annual GDP growth.
Furthermore, this government spending will be in areas of health and education which will reap long-term benefits in productivity. This increase in public spending will help absorb the hit to the economy from reduced consumption.
Inflation is a global story. However, Australia is better placed than most to achieve a soft landing:
We haven’t experienced the wage-price spiral that other countries have. As an energy and agricultural exporter, we haven’t been as affected by the war in Ukraine. And the RBA has been slower to act on rates. The global inflation story might recover before all planned rate rises are needed.
We may be better placed for a soft landing, but it will still be a bumpy ride.
But with volatility, comes opportunity.
At current levels, fixed income can once again serve as an income-generating defensive asset.