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Economic outlook 2022 Apr
We start this article simply trying to list the growing unique mix of recent events – the restart of economies living with Covid, new virus strains, surging oil and energy prices, shifts and disruption to inflation from supply pressures, free falling equity markets, the cost of living rising dramatically, new central bank frameworks (possibly causing markets and policymakers to misread inflation)/government temporary fixes/ interest rate increases/ builder bankruptcies and the relentless bolts from the blue from the geopolitical landscape resulting in war.
Investing today is like trying to be a Marvel super hero at the front line where there are many forms of evil all with their own special powers causing various types of destruction. What we have known as normal for decades is under full blown attack causing fear and volatility making us acknowledge that forecasting markets today is almost folly with so many conflating influences. This is further substantiated with most forecasts from global financial houses for 2022 out of date by February this year with the exception of interest rate increases.
The good news isthat often we underestimate how forward-looking financial markets are. Although we have experiences turbulent market movements over the last 6 months a lot of that fear and over reacting is already in the market. Sticking to a diverse investment strategy and not getting caught up in the gut wrenching daily market moves has again and again over history has proven too be the right strategy.
Property market
Real Estate is historically an attractive investment during periods of inflation and rising rates as it is underpinned by hard asset value that generates a current yield and benefits from underlying cash flow growth but there are many factors at play that need acknowledging and their impact on risks for property returns.
- The uncertainty we have seen over the last two years will continue with the war and the unknown of what comes next from geopolitical risks.
- Property has to readjust to the new world order – Although shopping, health and education all transitioned in some form to online the living experiences and social interactions are now more important than ever and should see a bounce back for hospitality and events. This means a focus on property sector is more important than ever.
o Office as a sector will continue to be weak with the new hybrid version of where people work settles into its new norm – flexible working and not everyday in the office
o Retail softness will continue as online shopping remain buoyed
o Distribution warehouses will remain strong
- More builders will fail:
o Supply issues around building materials will continue to place upward pressure on building costs and squeezing of margins
o Workforce issues due to Covid over last two years and learning to live with Covid will still stimy productivity
- With less supply coming on the market this will support property prices even with the threat of increasing rates. This is causing a shift in lending from fixed to floating rates.
Technology costs rising
Workforce shortages in technology are placing significant pressure on wage cost and worker turnover. COVID and the corresponding acceleration of the digital uplift of all businesses has placed a premium on engineers like DevOps, full stack development, JavaScript and cybersecurity.
Economic impacts to remain
- Continued equity market volatility due to concern over what’s coming next
- Interest rates in Australia will likely be on hold watching the global stage and local supply pressures
o RBA Governor Philip Lowe believes that inflation psychology evidenced over the past decade appears to be shifting and he hopes the recent inflation spike is a one-off, caused by current supply chain disruptions and surging oil prices.
o “We can be patient in a way that countries with substantially higher rates of inflation cannot.” (Governor Philip Lowe)
- Interest rates to rise again in the US but not as quickly as forecasts from late 2021 due to supply forces on inflation.
- Workforce shortages to put pressure on wages with unemployment rates low and highly skilled tech jobs extremely hard to fill
- Energy prices continuing to remain at high levels due to in particular Europe’s reliance on Russia and if alternatives sourced the tyranny of getting from one continent to another eg US to Europe
- Russia to continue is aggressive stance trying to rewrite history’s current version of the end of the Cold War to deflect their nations focus on is domestic issues in particular their slowing economy – easier to point the blame elsewhere.
What we expect from here
- Recovery to share markets to be slow and volatile
- Property values will continue to stay supported due to slowing supply though pockets of volatility from interest rate pressure
- Property developments not already underway may slow with cash flow restraints arising from significant materials increases
- Interest rate pressure will remain but with a watchful not reactive RBA staying diligent on inflation influencers
- The Russian invasion of Ukraine will continue to cause some volatility
- Significant risks of off the grid war tactics like the cyberattack on Ukraine is a risk for all countries
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