Outlook uncertain as pandemic-related economic disruptions continue

Growth assets continued their recovery from the March 2020 lows to deliver double-digit returns across the board towards the end of 2021.

Global shares delivered the strongest returns, driven by US and European shares and a weaker currency exchange between AUD and USD.

Australian shares lagged global shares mainly due to weakness in some of the large caps. The iron ore price fell significantly during 2021, dragging the big miners down.

However, Australian property continues its strong rebound, fuelled by a recovery in market activity and very low interest rates. Infrastructure was also solid with an increase in mergers and acquisitions (M&A) activity being a key theme.

Current economic outlook

Moving into the end of 2021, the economic outlook has become even more uncertain than usual.

A new wave of COVID-19, in the form of the Omicron variant, has complicated the growth outlook at the same time that inflation is running rampant.

Australian consumers saw prices rise by 3.5 per cent in 2021, with most increases driven by pandemic-related economic disruptions. Record-high fuel prices saw a rise in transport costs and subsequent higher freight costs for a range of goods.

This has been fastest annual hike in prices in years, meaning that Australia hasn’t avoided inflation, much like we’re seeing in other countries globally. The Australian Bureau of Statistics (ABS) also showed that, in the final quarter for 2021, prices of non-discretionary items (e.g. food, fuel, housing health costs) were rising much quicker than discretionary items.

Central banks are under increased pressure to act on inflation and the US Federal Reserve (Fed) has already signalled that it will begin lifting interest rates in the first quarter of 2022 due to a better-than-expected recovery in jobs. Although, the Reserve Bank of Australia (RBA) remains steadfast in not reacting to this news (to date).

Together, Omicron and the Fed tightening monetary policy will likely make people more cautious on the outlook. However, fiscal and monetary policy is still very accommodative, and the Fed is tightening from previously very loose conditions.

In some respects, the Fed beginning to act on inflation may be a positive in that it has kept a lid on bond yields thus far.

We expect that the disruption from Omicron will see the Fed only tighten gradually. In addition, the inflation numbers are likely to retreat during the year, due to the high base effect.

While inflation in Australia is certainly not out of control (we are tracking much lower than countries like the US, UK, and Canada) and jobs growth is robust, investors are likely to remain cautiously optimistic as we navigate the next quarter and determine how its outcomes impact financial decisions.

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