Going for Goldilocks

Most advanced economies have seen peak growth and policymakers now have the unenviable task of guiding the transition to a new normal, focusing on fixing supply-demand imbalances and helping both inflation and unemployment to fall. There is little room for error. Asset markets will need to cope with both the implications of policy normalisation and slowing growth rates that will weigh on returns. Uncertainty remains elevated, not least because of the appearance of the Omicron variant that presents considerable downside risks to the outlook.

Equity markets have priced in much of the good news on economic recoveries so while they will remain favoured by investors, returns will be challenged in 2022 by the impact of slowing growth rates, already elevated inflation, and inevitable monetary policymaker action to gradually wind back pandemic-induced emergency settings.

In Australia, the relatively aggressive public health approach to the health crisis through the second half of 2021 saw it fall behind many advanced economies in terms of recovery, but price pressures have been more moderate than other advanced economies. Although markets believe that rates could begin rising in mid to late 2022, this is significantly earlier than the RBA’s initial forward guidance of 2024 at the earliest.