How Macquarie sees the outlook for Australia and the U.S.
In two recent blogs, we outlined the views of Goldman Sachs strategists on the Australian and U.S. economic outlook, and the implications for investors. In this blog, we turn to the views of Macquarie Bank. Their forecasts for the ASX100 are particularly noteworthy.
Central to the Goldman Sachs worldview is that a soft landing for the U.S. economy is not only possible but probable.
However, that is not the view held by Macquarie Bank. Dominic Rose, co-portfolio manager of the Montgomery Small Companies Fund, recently attended a briefing held by Macquarie strategists, who described a soft-landing as “mythical.”
Macquarie expects a tricky 2023, with everything centering on central bankers’ abilities to engineer a soft landing.
They believe that, with the benefit of hindsight, the coordinated COVID stimulus was too much. The U.S. injected US$5.4 trillion, or 25 per cent of GDP. Australia injected the equivalent of 20 per cent of GDP. Rates were cut to zero and central banks expanded their balance sheets by buying assets.
Today, overheated economies are common and inflation is unacceptably high. Central banks, however, have realised their mistakes so have been compensating by tightening late and fast. Consequently, global economies are now slowing very fast.
Will global economies see a recession next year?
Macquarie Bank believes, in all likelihood, global economies will tip into recession next year. Noting economists have historically been very bad at forecasting recessions – only about three per cent accuracy when forecasting a year earlier – the consensus view is Europe and the U.S. will be in recession next year. The bond market, which unlike economists, has been very good at forecasting recessions, is predicting one. The bond market yield curve is now most inverted since the 1980s.
The current U.S. hiking cycle is unprecedented in its pace with rates rising from zero to five per cent in a year. Given the rate rises have been accompanied by Quantitative Tapering, Macquarie Bank believes it would be remarkable not to have an economic accident.
Macquarie Bank puts resilient economic data down to lags and expects the U.S. Federal Reserve to hike 50 basis points this week and to keep hiking until the U.S. economy goes into recession. An energy shock will be another reason for a recession. Jumps or shocks in energy expenditure – we have just witnessed as big a jump as was seen in the 70s and 80s – are invariably followed by recessions. This time it is much less about oil, and more about electricity prices and coal. And while inflation has peaked, energy prices will remain high.
Macquarie Bank observes that inflation is high and central banks are still hiking aggressively. Eventually the pace will slow but rates will keep going up. Macquarie Bank notes rates are now above neutral in UK and Europe, and yet they are still going up.
Macquarie Bank believes the probability of a short recession in Europe is very low. The tide there is going out very rapidly.
The U.S. has been more resilient and so the problem there is inflation is still way too high. Macquarie Bank’s thinking on this subject concurs with Goldmans.
The US will need to hike more and drive unemployment up a few percentage points. Expect a U.S. recession in Q1 or Q2 next year. If inflation comes back under control it should be a good set up for investments in 2024. Macquarie Bank believes central banks are doing the right thing, taking the pain now, rather than dealing with stagflation later.
How will China opening up impact the world?
China’s zero COVID policies have significantly impacted GDP. The world has worked out a country must either have zero COVID or a lot of COVID, it can’t have a bit. China is opening up now so COVID will spread rapidly. It will be positive long-term but the market has become too excited in the near-term and big outbreaks will set markets back.
China hasn’t used any western vaccines – so its experience could be much worse than the Hong Kong experience which itself was terrible. China needs to open, so it will, but it will be disruptive. Think buy-the-rumour and sell-the-fact. The China reopening story has played out and coincided with the rally and as China has announced a reopening, the market has sold off given fears that the reopening will be negative due to inflations and deaths.
Australia is experiencing a spectacular recovery according to Macquarie Bank. The stimulus was too much and the RBA took too long to rein in support and consequently the economy overheated. Consumption in particular has been very strong with everyone making up for being locked down. The RBA says inflation is not as bad in Australia as the U.S. and so our rate policy doesn’t need to mirror the U.S. However wage growth is no longer contained. Private wages growth of five per cent is way too high. The RBA needs to get wage growth back into the three per cent growth range. It will take some time and the RBA will need to push the unemployment rate up a percent or two. Needs to do enough to slow the economy down to soften the labour market.
We were lagging peers in terms of rate rises and the RBA has more work to do. Australia needs a major slowdown and, according to Macquarie Bank, the RBA probably needs to push the economy into recession. Macquarie for its part is not forecasting a recession.
In the U.S., 50 per cent of economists are forecasting a recession there next year. In Europe that number is 90 per cent. In Australia only 10 per cent of economists are forecasting a recession next year. Macquarie Bank thinks Australian economists are way too optimistic and a recession is a 50/50 bet.
Macquarie believes equity markets are currently in a bear market rally and there is more pain to come. The reason the ASX100 has done so well is because the mining sector accounts for half of Australia’s earnings. Commodity prices however are correlated to global growth.
With respect to predictions of a U.S. recession, Macquarie Bank believes a recession will be announced in Q2 2023. Lots of people are determined to have a normal Christmas this year and will tighten belts next year. And if the economy turns out to be more resilient, then the Fed will do more to slow it down.
You can read the previous two bogs here:
How Goldman Sachs views the Australian economy