Russell Investments Global Market Outlook, Q2 2023
Growth has been resilient, but inflation is receding only slowly, and central banks have not finished tightening. Meanwhile, recession indicators are still flashing warning signals. In our view, this creates a positive backdrop for government bonds and uncertainty for equity markets.
Australian outlook
Australian growth should continue to slow through 2023, but recession risk is lower than in the northern hemisphere. Many mortgage interest rates will reset from April, and the increase in mortgage payments will weigh on household consumption. Importantly, many households have substantial home equity which reduces the potential for significant mortgage defaults.
The labour market is very tight but is likely to ease through 2023 as labour demand moderates and labour supply increases as immigration resumes. This should keep wage pressure relatively contained.
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The Reserve Bank of Australia has recently signalled that it is near the end of its tightening cycle, and we believe that Australian government bonds offer attractive valuations. The Australian dollar has seen further selling pressure given the divergence in central bank policy between the U.S. and Australia and now looks attractively valued.
New Zealand outlook
Recession risk in New Zealand remains elevated, given the elevated levels of household debt and the aggressive policy actions of the Reserve Bank of New Zealand (RBNZ). Even the RBNZ forecasts a recession to occur this year, with a peak-to-trough decline in GDP of around 1% expected.
We do not anticipate any meaningful change in fiscal policy from new Prime Minister Chris Hipkins (following former Prime Minister Jacinda Ardern’s resignation) and look instead to the general election in October.
