The Point

The good news? We’re avoiding recession. The bad news? Living standards are going backwards

This week the ABS released our latest national accounts – quarterly estimates of economic flows such as GDP, consumption, investment, income and saving – for the June quarter.

What did we learn?

“First, the good news,” says Pendal head of bond strategies Tim Hext. “We are avoiding a recession.

“GDP is 2.1% higher than a year ago, though slowing. It’s been 0.4% for two quarters now and will likely end the year near 1.2% – slightly higher than the RBA forecast of 0.9%.”

The bad news?

“We’re clearly in a per-capita recession,” says Tim. That means economic growth is not keeping pace with population growth.

Which means the average person is going backwards in their standard of living.

“Our population grew by 0.7% in Q2, the economy only 0.4%. GDP per capita is now 0.3% lower than a year ago and 0.6% lower than six months ago.”

Why is this happening and what’s next?

What’s driving ASX stocks this week

Three things stood out among the best industrials this ASX earnings season

What did the best-received results have in common this ASX earnings season?

Among industrials – which includes industries such as transportation and machinery – it was all about pricing power, cost of debt and where a company sits in its business cycle, says Pendal analyst Anthony Moran.

“Some companies with pricing power have not only kept up with prices, but have also been able to achieve some margin expansion,” says Anthony. He points to James Hardie and Boral as examples.

This season marked a return to more typical themes after cost control, staffing and inflation dominated post-Covid reporting, Anthony says.

And don’t forget the weather.

“It’s not just resilient demand in Australia. It’s also the good weather. That’s quite significant for Australian construction companies.”

Anthony has details here

What about the rest of the ASX? Find out next Thursday when Pendal’s head of equities Crispin Murray delivers his bi-annual Beyond The Numbers report.

Inflation back below 5pc – but getting to 2-3pc remains a challenge

Annual inflation fell below 5 per cent in July and looks on track to hit 4 per cent or lower by the end of the year as 2022’s higher numbers drop out.

That reduces any urgency around further rate hikes – particularly since the fixed-rate cliff is now peaking, which effectively increases rates independent of the RBA.

However, the battle to get inflation back into the 2-3% band will still be a challenge next year and rate cuts seem a distance away, says our head of government bond strategies Tim Hext.

When Dr Michele Bullock takes over as RBA governor on September 18 she will be keen to establish her inflation credentials – so any move to a dovish outlook is unlikely, says Tim.

“For now, rates remain range-bound – as do risk markets,” he says.

Emerging markets: Brazil is set up for a classic virtuous cycle  

Brazil’s bigger-than-expected rate cuts are raising the chances of sustained economic outperformance.

And markets are underplaying the likelihood of further rate cuts in Brazil, argues James Syme, who manages Pendal Global Emerging Markets Opportunities Fund

South America’s biggest country is showing signs of entering a classic emerging markets virtuous cycle of capital inflows, strengthening growth and rising markets, says James.

Brazil’s central bank cut its key interest rate 50 points to 13.25 per cent in August, ending eight months of keeping borrowing costs on hold.

Market expectations are for further cuts to 12 per cent by the end of the year and 9.25 per cent by the end of next year. But Syme says those expectations are likely short of the mark.

“Emerging markets tend to overshoot to the downside and then to upside. We think Brazil is setting up to be in a cycle of much more positive news, and that should be reflected in equity prices.”