Stephen Miller

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Shane Oliver

Key points

• National average home prices were flat in May according to Cotality, the weakest since January last year. Prices fell further in Sydney and Melbourne, and the boom time cities of Brisbane, Adelaide and Perth are seeing growth slow.
• The housing shortage and expanded 5% deposit scheme are being offset by rate hikes, low confidence & the Budget tax hikes on investors with a further fall in prices likely.
• We now expect national average property prices to fall around 1% this year (revised from around 3% growth) and to fall around 5% over 2026-27.
• Units and lower end property are likely to hold up better due to the expanded FHB 5% low deposit scheme. The tax changes also favour properties with higher rental yields.
• The combination of a rising long-term trend in rates, poor affordability, the tightening of property tax concessions and a political shift towards lower immigration may mean the 30-year super cycle upswing in prices may be close to over. The housing shortage remains the key sticking point though.
• Asking rents rose 0.6% in May, with annual growth rising to 5.9%yoy as vacancy rates remain low. This is not good for inflation.

Home price cycle turning down

Cotality data shows national average home prices were flat in May, with capital city prices down 0.1%, their second monthly fall in a row. Prices have now fallen 2.1% in Sydney and 2.9% in Melbourne from their November highs. The boom time cities of Brisbane, Adelaide and Perth are also seeing slower growth.

The broad picture remains one of a continuing slowdown since late last year reflecting a combination of rate hikes, poor affordability, depressed buyer confidence partly reflecting the oil supply shock and the Budget changes to exclude new purchases of existing properties from negative gearing and shift to the taxation of real capital gains from the 50% discount approach. Interestingly, up until Budget day the five capital city average prices were up slightly in May with all the monthly fall occurring since then suggesting the tax changes are having a significant impact. Working the other way, the boost from the expansion of the 5% low deposit scheme for first home buyers is showing up in relatively stronger conditions in lower quartile property prices and in units. They are also benefitting from poor affordability pushing buyers into lower price points.

The slowdown is also evident in weak auction clearance rates.

Expect home prices to fall further over the next year

There are two key supports for the property market. First there remains an accumulated housing shortfall – of 200,000 to 300,000 dwellings – that has built up after years of very strong population growth. This is evident in low rental vacancy rates. Second, the expanded first home buyer 5% deposit scheme will help provide support lower priced entry level houses and units. But the bring forward of FHB demand due to the 5% deposit scheme will hit an air pocket at some point, probably next year.

However, despite these sources of upwards pressure on property prices, the Australian housing market is likely to cool further as rate hikes, already poor affordability, the impact of the War and a wind back in property tax concessions impact.

• Rate hikes – the RBA has raised rates three times back to their prior 2023 cycle high. While it’s likely to leave rates on hold this month we expect another hike in August. Rate hikes have usually been associated with some softening in property prices or slower growth. This is because they cut how much buyers can borrow, hit confidence and can boost distressed sales. Of course, this is not always the case as other factors can intervene like the population surge in 2023 which pushed prices up despite high rates but that seems unlikely this time.
• Poor housing affordability – the ratio of home prices to wages and incomes is at record levels. This, combined with rising mortgage rates, is leading to a widening gap between home prices and what an average buyer can afford to pay for a property.

• Poor buyer confidence – confidence has plunged as have perceptions of whether it’s a good time to buy a dwelling. The longer the Strait of Hormuz takes to return to normal the greater the risk of recession & higher unemployment, which could be a big drag on property prices.

• Tax hikes on investors – the move to remove negative gearing from new purchases of existing homes and return to the taxation of real capital gains with a minimum tax rate of 30% is likely to drive a decline in investor demand for housing in the near term. This is because the tax changes mean lower after-tax returns for investors going forward which will mean new investors will demand either lower prices or higher rents or some combination resulting in a higher starting point rental yield to make up for the less favourable tax treatment. This will be reinforced by banks reducing how much they can lend to investors due to their reduced cash flow from the tax changes. Various studies suggest this will reduce home prices by 1 to 5%. Given the risk investor sentiment weakens by more than justified by the tax changes we are assuming a 5% negative impact on property prices with the impact occurring over the next 12 months.

As a result, it’s a bit of a perfect storm for the property market. After 8.9% growth in 2025 we now anticipate a fall in national average home prices of around 1% this year and 5% over 2026-27.

However, this will likely mask a wide divergence between cities and property types. In terms of price to rent ratios adjusted for inflation as a rough guide to whether the market is over or under valued – a bit like the PE for shares – houses are 36% overvalued compared to units at just 9% and so are far more vulnerable to a fall in prices. See the next table. And units are likely to be supported by FHBs using the 5% deposit scheme. Using the same approach – in terms of houses Brisbane, Sydney and Adelaide are the most overvalued and vulnerable and in terms of units Brisbane, Adelaide and Canberra units are the most vulnerable.

Is the super cycle upswing in property prices over?

Since the mid-1990s Australian property prices have been in a long term, or super cycle, upswing. The next chart shows real home prices (average property prices after removing increases in inflation) indexed to start in 1926 at 100 (red line) against their long-term trend (blue line).

Over the last 100 years real property price growth has averaged around 3% per annum which is in line with long term average real GDP growth (which is a rough proxy for real income growth). We can see that real Australian property prices have gone through three major long-term (or super cycle) booms (highlighted with green arrows) and two major long-term busts or weak periods over the last century.

• The first long term boom was in the 1920s and was associated with an economic boom and very strong population growth from the end of WW1 until the early 1930s. See the first circled area in the next chart showing population growth.
• This was followed by a collapse in property prices associated with the Depression, a plunge in population growth and the early years of WW2, with real prices not bottoming until 1943 – maybe after many in Sydney’s Eastern suburbs sold up after the 1942 midget sub attack!
• The second long-term boom got underway after WW2 and ran into the early 1970s supported by very strong economic and population growth (the second circled area in the population chart). This saw real property prices rise from 50% below their long-term trend to be 50% above trend by 1973.

• This long boom ended in the mid-1970s with the economic malaise of the time, a step down in population growth and the high interest rates of the 1980s. Unlike the collapse of the first long-term boom, it saw real house prices churn sideways in a wide range with some strong periods along the way (such as in 1988-89). But because of a 20 year plus churn in real house prices, by the mid-1990s real prices were more than 20% below their long-term trend and little different to where they were in the mid-1970s. This was a great time to get into Australian property!
• This set the scene for the start of the current long-term boom in property prices in the second half of the 1990s, that has taken real property prices from well below trend to around 20% above trend.

The super cycle upswing in real property prices over the last thirty years has been propelled by a combination of:

• the shift from high mortgage rates – they were 17% in the late 1980s/very early 1990s – to low rates of 2-3% a few years ago, which enabled buyers to borrow more and hence pay more for homes;
• the easier availability of home loans with financial deregulation;
• the growth of two income households adding to how much buyers could borrow and pay each other for homes;
• a surge in underlying demand for housing as a result of a surge in population growth on the back of high immigration levels starting around 20 years ago which has continued albeit with a brief pause in the pandemic (see the third circled area in the last chart); and
• some would say the shift to taxing 50% of capital gains from taxing real capital gains in 1999 which combined with negative gearing and high marginal tax rates to boost investor demand for property.

This combined all goes a long way to explain how Australian housing went from cheap in the mid-1990s to expensive in the early 2000s and has stayed there ever since, in fact becoming more so. This can be seen in the surge in house price to wage and income ratios since the 1990s.

The main drivers have been the combination of low rates and an undersupply of property where people wanted to live (big cities). Other countries have had low rates and tax breaks too, but they have kept housing more affordable because of a better supply/demand balance.

The last two long booms or super cycle upswings were bought to an end by Depression and severe stagflation which hopefully won’t be the case this time. However, there are some reasons to believe that the long-term boom in Australian property prices may be close to an end as some of its drivers are starting to fade or have run their course:

• First, the long-term decline in mortgage rates that started in the 1990s and continued to 2020 when mortgage rates hit 2-3% looks to have bottomed. Rates rose in 2022-23, there was a brief and modest fall last year but now they are on the way back up again. For various reasons we now appear to have entered a more inflation prone world which means higher rates. So, the trend to ever lower mortgage rates driving ever higher amounts of money people can borrow enabling ever higher home prices may be over.
• Second, two income families are now the norm and so the boost from the move to this likely doesn’t have much further to go.
• Third, immigration is trending down with the Government forecasting a fall to 225,000 pa, the Coalition talking of 165,000 or so & One Nation talking of 130,000 with an aspiration of net-zero.
• Finally, the tax concessions for investors have been curtailed.

Calls for an imminent end to the property super cycle need to be treated with some caution though. I thought it might be close to over five years ago, but it was extended by a surge in immigration coming out of the pandemic and constrained home building resulting in a chronic undersupply of housing. Another surge in immigration is unlikely, but a 200,000 to 300,000 housing shortage remains. And with home building running around 180,000 a year and likely to slow in response to rate hikes it’s likely to remain well below the Housing Accord target of 240,000 a year which is necessary to meet annual housing demand and eat into the accumulated undersupply. So, at this stage while many of the conditions are falling into place it may be premature to call an end to the home price super cycle boom of the last 30 years until the supply shortfall comes under better control.

What to watch?

The key things to watch with respect to the next 12 months will be interest rates, the Strait of Hormuz, unemployment and investor demand in response to the tax hikes. Several more rate hikes, a sharply rising trend in unemployment and a big drying up in investor demand could result in much bigger price falls than 5%. On the flip side a quick resumption of rate cuts, a quick resolution of the oil supply shock and a subdued investor response could drive stronger property prices next year. Overall, the risks for home prices over the next 6-12 months seem skewed on the downside but note that in the absence of much higher unemployment, forecasts for a property price crash (say a 15-20% fall or more) are likely to be wide of the mark. A crash would require wide scale forced selling by homeowners – but without much higher unemployment forcing homeowners to sell this is unlikely as Australians will do whatever they can to keep servicing their mortgage.

In terms of the 30-year super cycle upswing – many of its key drivers are now fading but the supply shortfall is key. If it closes quickly thanks to stronger supply or a faster fall in immigration, then the super cycle upswing may well be over.

By Dr Shane Oliver Head of Investment Strategy and Chief Economist, AMP

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Important note: While every care has been taken in the preparation of this document, neither National Mutual Funds Management Ltd (ABN 32 006 787 720, AFSL 234652) (NMFM), AMP Limited ABN 49 079 354 519 nor any other member of the AMP Group (AMP) makes any representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. This document is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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The past week has been dominated by developments around a US/Iran peace deal – but despite some gyrations its looking like a deal is on the way. The week started optimistically with Trump saying “final aspects & details are…being discussed and will be announced shortly”. But this was followed by more strikes on Iran and Trump saying he is “not satisfied”. But the indications are now that a tentative deal has been reached, pending Trump’s sign-off with him saying he is making a “final determination”. This looks like it would reopen the Strait of Hormuz and extend the ceasefire for 60 days during which negotiations regarding Iran’s nuclear program will proceed. Of course, the deal could still collapse with both sides sending mixed messages. Iran’s desire to toll ships through the Strait, it’s enriched uranium, sanctions & Lebanon are sticking points. And a cynic might say the likely deal just leaves us where things were before the War with no progress on Iran’s nuclear ambitions so it could all flare up again.

But the pressure on Trump to do a TACO and strike a deal is very high as his approval rating is continuing to collapse heading into the mid-terms. He has said it doesn’t matter but it likely matters to him bigly as the longer the Strait remains closed the more global oil reserves run down leaving the clock ticking on when the full impact of the roughly 12-13% cut to global oil production hits the global economy in full resulting in another spike in oil prices and even higher US gasoline prices – which US voters hate.

Of course, while Trump wants to TACO it requires Iran to provide the sauce.

With a deal likely nearing oil prices have fallen back to the lower end of the range they have been in since the War started. Oil futures are continuing to price a fall on the grounds that the Strait will be opened eventually but that prices will be above pre-War levels as it will take a while for oil and fuel production to ramp up again with a risk premium priced in to allow for the risk of a resumption of the conflict. This is in line with our own views.

Helped along by the reports of a peace deal nearing agreement and ongoing optimism about the boost from AI related demand to profit growth, global share markets rose over the last week. US shares rose 1.8% to a new record high, Japanese shares rose 4.7% also to a new record high, Eurozone shares rose 0.5% and Chinese shares rose 0.9%. Australian shares rose 0.9% for the week, with gains in retailers and miners partly offset by falls in telcos and energy shares, but they remain significant underperformers. While the US share market has surged to new record highs helped also by very strong profit growth and still solid economic activity, the Australian share market has been continuing to struggle not far from its March lows in response to profit downgrades, three rate hikes from the RBA, capital gains tax changes and greater scepticism locally regarding a quick reopening of the Strait.

News of a peace deal saw bond yields fall on hopes for lower inflation with lower oil prices. Metal and gold prices rose over the week, but iron ore prices and Bitcoin fell. The $A rose slightly as the $US fell slightly.

Despite optimism for lower oil prices, central banks continued to edge in the direction of higher interest rates over the last week. Another Fed Governor – Lisa Cook this week, Christopher Waller last week – came out warning of a rate hike if inflation doesn’t start to fall soon. And unfortunately, US core private final consumption inflation rose further in April to 3.3%yoy. And both the Bank of Korea and Reserve Bank of New Zealand while leaving rates on hold warned of rate hikes ahead. Its early days, but as can be seen in the next chart the percentage of global central banks hiking is hooking up.

The risk here is that expectations for higher inflation and rates could drive another leg higher in global bond yields which could put pressure on share markets. A quick reopening of the Strait could short-circuit this though.

In Australia though, mixed inflation data for April provided a bit of relief. The good news was that headline CPI inflation slowed more than expected to 4.2%yoy from 4.6%yoy with a bigger than expected fall in fuel prices (helped by the fuel tax cut) and free public transport in some states. Electricity prices fell 0.9%mom and the annual price ruling from the energy regulator points to falling prices from July helped by record output from wind farms and batteries. (So more clean energy can lower electricity prices!) The bad news was that underlying or trimmed mean inflation edged up further to 3.4%yoy from 3.3%yoy and appears to be tracking in line with the RBA’s forecast for a 0.95%qoq/3.8%yoy rise in the current quarter as a whole.

Some good news on the underlying inflation front was that the breadth of price rises has improved slightly with slightly more CPI items seeing inflation below 2%yoy than above 3%yoy. But against this the second round impacts from the oil supply shock to transport costs, plastics, food prices etc are yet to impact, housing costs are continuing accelerate with new dwelling prices up 0.7%mom and a rise in asking rents pointing to higher rents, business surveys continue to show a sharp rise in cost pressures and there is a high risk that an acceleration in minimum and award wage rises will contribute to stronger wages growth.

On balance the mixed inflation data for April, coming on the back of soft April jobs data, depressed confidence and signs of softening household spending will likely see the RBA leave rates on hold at its June meeting as it waits to see the impact from its three back to back rate hikes and how the oil supply shock pans out. However, we are continuing to pencil in a further and likely final rate hike in August as underlying inflation remains too high. The money is currently pricing zero chance of a rate hike in June and a 70% probability of a further hike by year end.

While some of the lyrics in Melting Pot are questionable and it doesn’t go down well with the identity politics and even multiculturalism of today – there is something naively appealing in the hippie sentiment of “what we need is a great big melting pot…and turn out coffee coloured people by the score” as way to a “get along scene”.

Major global economic events and implications

US economic data was mixed. Personal spending growth was soft but okay in April, the trend remains up in underlying capital goods orders and shipments – helped by the data centre boom – and jobless claims remain low. Against this though consumer confidence as measured by the Conference Board fell slightly, the falling savings rate is removing a source of support for US households, new home sales remain weak, and home prices fell slightly again in March. But while it’s mixed the Atlanta Fed’s GDPNow tracker for June quarter GDP has growth picking up to 3.8% annualised from just 1.6% in the March quarter.

Meanwhile, the US core PCE measure of inflation rose to 3.3%yoy and is likely to rise further in the months ahead. While it wasn’t as high as feared its moving further away from the Fed’s 2% target and supporting concerns that the Fed may have to raise rates this year.

Japanese economic data was strong with industrial production and retail sales up strongly and unemployment down. Against this, Tokyo inflation fell to 1.4%yoy.

Australian economic events and implications

Australian business investment in the March quarter looks to have been strong helped by booming data centre investment. Real private capital spending (capex) rose 6.5%qoq in the March quarter reflecting an 18%qoq surge in plant and equipment investment driven by another big spike in IT investment in data centres. This may be great for the economy longer term but just bear in mind that a big chunk of it will be imported so it doesn’t necessarily mean a surge in March quarter GDP growth. Mining capex is trending sideways albeit at a solid level, and non-mining non-tech capex fell but it is in a rising trend.

Business investment plans for the year ahead are for solid growth with capex plans 11% higher than a year ago.

Construction work in the March quarter was also stronger than expected, up by 3.4%qoq. The upside surprise though was in engineering and narrowly concentrated in WA suggesting it was mining sector related. In terms of building – home building actually fell 0.6%qoq but non-residential building actually rose 2.5%qoq.

Household spending data for April was a bit less bright falling a greater than expected 1.1%mom and slowing to 4.9%yoy. The fall was largely driven by lower fuel prices, but spending was softer generally including in reduced travel. Real spending growth is still running around 2.5%yoy, but the slowing in April may be a tentative sign of flagging consumer demand with rate hikes and poor confidence.

What to watch over the next week?

In the US, expect the May manufacturing conditions ISM (Monday) and the services ISM (Wednesday) to both remain solid around 53, job openings and quits data for April (Tuesday) to show okay labour market conditions and May jobs data (Friday) to show a 90,000 gain in payrolls and a rise in unemployment to 4.4%.

Eurozone data is likely to show unemployment remaining around 6.2% (Monday) and CPI inflation around 3.3%yoy for May with core inflation rising to 2.4%yoy.

Chinese business conditions PMIs are expected to remain consistent with subdued but okay economic growth.

In Australia, the focus is likely to be on March quarter GDP data (Wednesday) which is expected to show a growth around 0.6%qoq or 2.7%yoy up slightly from 2.6%yoy in the December quarter with strong growth in business investment, moderate growth in consumer spending, a fall in housing and a detraction from trade. In other data, expect Cotality data to show a 0.1% fall in home prices in May (Monday) with further falls in Sydney and Melbourne and a further slowing in Adelaide, Brisbane and Perth as higher interest rates, poor buyer confidence and the Budget move to increase property taxes for investors depress demand. Building approvals for April (Tuesday) are likely to show a 2% bounce and the trade balance (Thursday) is likely to swing back into a $1.5bn surplus after a surge in imports of fuel and data centre related equipment resulted in a $1.8bn deficit in March.

Outlook for investment markets

Global and Australian share markets have likely seen the worst from the War and oil shock if the flow of oil quickly resumes but the risk of further falls taking us to a 15% top to bottom correction remains high given uncertainty around the flow of ships through the Strait along with still stretched valuations, political uncertainty associated with Trump & the midterm elections and worries about private credit and the impact of AI. However, returns should still be positive for the year as a whole thanks to Trump still likely to pivot to consumer-friendly policies and solid profit growth.

Bonds are likely to provide returns below running yield this year.

Unlisted commercial property returns are likely to be solid helped by strong demand for industrial property associated with data centres.

Australian home price growth this year is likely to slow to around flat with prices likely to fall over the year ahead due to poor affordability, RBA rate hikes, reduced investor demand flowing from the winding back of negative gearing and the capital gains tax discount and the hit to confidence from the War.

Cash and bank deposits are expected to provide returns around 4.25%.

The $A is likely to rise as the interest rate differential in favour of Australia widens. Fair value for the $A is around $US0.72.

By Shane Oliver

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Shane Oliver

Key points

• The combination of the natural human tendency to focus on bad news, expectations rising beyond the ability of the economy to deliver, the increased availability of information & the rise of social media are likely magnifying perceptions around worries and making it easier to be gloomy.
• However, to succeed as an investor it makes sense to err on the side of cautious optimism: otherwise, there is no point in investing; growth assets like shares have trended up over the long term; and trying to get the timing right of the 2 or 3 years out of 10 when they fall can be very hard.

“I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.” J.S. Mill

Introduction

In a recent Econosights my colleague Diana Mousina pointed out that much of the gloom and doom around Australia is overdone. This is not to say we don’t have issues – including poor housing affordability – or that we can’t do a better. But pessimism can feed on itself and lead to political – and notably populist – outcomes based on simplistically attractive notions that make any perceived problems far worse, not better.

But there is also another angle to this in that history tells us that succumbing to pessimism as investors doesn’t pay. Of course, this is often easier said the done. The “news” has always had a negative bent, but one could be forgiven for thinking it’s become even more so with constant stories of disasters, conflict, wrongdoing, grievance and loss. And the worry list for investors seems more threatening – with trade wars, social polarisation, rising geopolitical tensions and wars, alarm about climate change, talk of job loss from AI, higher public debt and higher inflation.

Four reasons why worries might seem more worrying

There is no denying there are things to worry about and that these may result in more constrained investment returns at some point. But four things may be combining to add to a greater sense of pessimism.

1. First, our brains are wired in a way that makes us natural receptors of bad news. Humans tend to suffer from a behavioural trait known as “loss aversion” in that a loss in say financial wealth is felt much more negatively than the positive impact of the same sized gain. This likely reflects the evolution of the human brain in the Pleistocene age when the key was to avoid being eaten by a sabre-toothed tiger or squashed by a wholly mammoth. This left the human brain risk averse and on guard for threats. Which in turn makes us more predisposed to bad news stories. Hence the old saying “bad news” sells. This is particularly true as bad news shows up as more dramatic (e.g. “billions wiped off shares”), whereas good news tends to be incremental (e.g. “shares rose 0.3% today”). Reports of a plane (or a share market) crash will generate far more clicks than reports of less plane crashes (or a gradual rise in the share market) ever will. This bias towards bad news means prognosticators of gloom are more likely to be revered as deep thinkers than optimists as observed by the philosopher and economist John Stuart Mill in the quote above.
2. Secondly, we are now exposed to more information than ever. It’s easier to check facts, analyse things and sound informed. But it’s often just noise. As Frank Zappa noted “Information is not knowledge, knowledge is not wisdom.” If we don’t have a process to filter this extra information, we can suffer from information overload. This can be bad for investors as when faced with more information we can freeze up & make wrong decisions with our investments. Our natural “loss aversion” can combine with what is called the “recency bias” – that sees people give more weight to recent events – to see investors project recent bad news into the future and so sell after a fall.
3. Thirdly, the explosion in social media is serving to amplify bad news. We are now bombarded with economic and financial news and opinions from apps, subscription services, finance updates, dedicated TV and online channels, chat rooms and social media. To get our attention news needs to be entertaining. And, following from our aversion to loss, in competing for our attention dramatic bad news trumps incremental good or balanced news in getting clicks. And the social media algorithms amplify extreme views. So naturally it seems the bad news is “badder” and the worries more worrying. Politics has added to this with politicians more polarised and more willing to scare voters. Just Google the words “the coming financial crisis” and you’ll find lots of references to a major disaster ahead. People have always been making gloomy predictions but prior to the information and social media explosion it was harder to be exposed to such stories.
4. Finally, expectations have likely risen above the ability of the economy to keep up. My mother’s generation born in the 1930s saw depression, a world war and the regular death of siblings. Their expectations were low and it didn’t take much to make them happy in the 1950s (for my Mum it was holidays spent in a tent at the beach around a surf club). For them getting a consumer good like a car, fridge or washing machine generated a huge pay off in happiness. Today it’s very different. Consumer goods are ubiquitous and while smart devices come with great things they also come with a lot of bad (doomscrolling, bullying, a sense of missing out, amplification of grievance, etc) which can lead to agitation and dissatisfaction. We have lots more and live longer, but our expectations have increased beyond that. This makes it harder for the economy to deliver even if economic growth is good. This is consistent with studies on happiness that show that from low levels of income, extra income and the more things that come with it, can provide a big lift in happiness, but at higher levels extra income has little impact. This is not to deny issues around the cost of living or that we can’t do better by boosting productivity – but it suggests that even if the economy were to perform more strongly, we may not be any happier. As the next chart shows while GDP per capita has trended up happiness has fallen.

The danger is that the combination of the ramp up in information and opinion, our natural inclination to zoom in on negative news along with expectations rising beyond the ability of the economy to deliver is making us gloomier and more pessimistic. It could also make us worse investors: more distracted, pessimistic, jittery and short term focused.

Three reasons to be optimistic as an investor

There are 3 good reasons to err on the side of optimism as an investor.

Firstly, without optimism there is not much point in investing.  As the famed value investor Benjamin Graham pointed out: “To be an investor you must be a believer in a better tomorrow.” If you don’t believe the bank will look after your deposits, that most borrowers will pay back their debts, that most companies will see rising profits supporting a return to investors, that properties will earn rents, etc, there is no point investing.

Secondly, the history of share markets in developed well managed countries has been one of the triumph of optimists. Sure, share markets go through often lengthy bear markets – where pessimists look like winners – but the long-term trend has been up, underpinned by the desire of humans to find better ways of doing things resulting in real growth in living standards. This is indicated in the next chart which tracks the value of $100 invested in Australian shares, property, bonds and cash since 1900 with dividends, rents and interest reinvested along the way. Cash is safe and so fine if you are pessimistic but has low returns and that $100 will have only grown to around $16,000 today. Bonds are better and that $100 will have grown to around $50,000. Shares are volatile, but if you can look through that they will grow your wealth and that $100 will have grown to around $3.8 million. Residential property offers similar returns over the long term – although the line in the chart should be seen as indicative of the average return from property.

This does not mean blind optimism where you get sucked into every investor mania. If an investment looks too good to be true and the crowd is piling in, then it probably is. So, the key is cautious, not blind, optimism.

Finally, even when it might pay to be pessimistic – and hence to get out of the market in corrections and bear markets – trying to get the timing right can be very hard. In hindsight many downswings like the GFC look inevitable and hence forecastable and so it’s natural to think you can anticipate them. But trying to time the market – in terms of both getting out ahead of the fall and back in for the recovery – is very hard. A good way to demonstrate this is with a comparison of returns if an investor is fully invested in shares versus missing out on the best (or worst) days. The next chart shows that, if you were fully invested in Australian shares from January 1995, you would have returned 9.4%pa (with dividends but not allowing for franking credits, tax and fees).

But if you were pessimistic about the outlook and managed to avoid the 10 worst days (yellow bars), you would have boosted your return to 12%pa. And if you avoided the 40 worst days, it would have been boosted to 16.5%pa! But this is very hard, and many investors only get really pessimistic and get out after the bad returns have occurred, just in time to miss some of the best days. For example, if by trying to time the market you miss the 10 best days (blue bars), the return falls to 7.5%pa. If you miss the 40 best days, it drops to just 3.7%pa.

Sure, on a day-to-day basis it’s around 50/50 as to whether shares will be up or down, but since 1900 shares in the US have had positive returns around seven years out of ten and in Australia it’s eight years out of ten.

Getting too hung up in pessimism on the next crisis that will, on the basis of history, drive the market down in two or three years out of ten may mean that you end up missing out on the seven or eight years out of ten when the share market rises.

“Choose to be optimistic, it feels better.” The Dalai Lama

By Dr Shane Oliver, Head of Investment Strategy and Chief Economist, AMP

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Global share markets mostly rose over the last week with ongoing hopes for a deal to unblock the Strait of Hormuz and strong earnings data. This was despite worries about a more hawkish Fed and concerns about the inflationary consequences of the War. Chinese shares were an exception though and they fell slightly. Helped along by the positive global lead the Australian share market also modest a rise of 0.3%, despite ongoing concerns about the impact of the Budgetary tax hikes on investing. Strong gains in consumer and financial shares on the ASX were partly offset by sharp falls in utilities and industrials.

Metal prices rose slightly over the last week but gold and Bitcoin fell with $A and $US little changed.

The past week saw more of the same in relation to the Iran War – more threats from Trump followed by soothing words about “very big discussions” with Iran. While a few ships got through, the Strait remains effectively closed maintaining a roughly 12 or 13% hit to global oil supplies. The upshot is that Trump wants to TACO but Iran is still not willing to provide the salsa with uranium and transit tolls through the Strait remaining sticking points. So, the standoff continues, posing bigger risks to the global and Australian economies the longer it goes on.  This is leaving oil prices range bound, but with oil futures pricing in a fall on the grounds that a deal will be reached eventually. This remains our base case and Trump has been showing some signs of shifting focus to Greenland and Cuba lately!

Meanwhile, the ongoing impacts of the Strait blockage have added to concern that inflation and inflation expectations will rise further. Inflation data for the UK, Canada and Japan was better than expected, but the minutes from the Fed leaned hawkish with “many” Fed officials preferring to remove language indicating an easing bias and a “majority” indicating that a rate hike would be appropriate if inflation remained above target. The US money market has now removed expectations for a rate cut this year and now sees an 80% probability of a hike. Meanwhile, some emerging country central banks are coming under pressure to raise rates with the Bank of Indonesia hiking by 0.5% in the last week. This is all combining to maintain upwards pressure on bond yields.

The RBA has “space” to be in wait and see mode, but remains hawkish. The minutes from the last meeting noted that financial conditions are probably now a bit restrictive and that the three hikes this year give the RBA space to see how the War develops and impacts the economy. Soft jobs data for April – the last to be released before the RBA meeting next month – adds to the likelihood that the RBA will leave rates on hold in June. But the overall message from the RBA remains somewhat hawkish. This was highlighted in comments by RBA Assistant Governor Hunter who noted that a combination of factors meant that the boost to inflation from the oil supply shock could be “faster and more extensive” because of the starting point for the Australian economy of capacity constraints and already high inflation and with RBA research finding that price changes become more frequent when inflation is high which can lead to underestimating future inflation. The RBA is right to be concerned about a flow on to inflation expectations because five of the six years up until this year will have seen inflation above the 2-3% target, which risks increasing scepticism that the target will be met going forward which in turns risks a step up in wage demands and price rises. With the release of UK and Canadian inflation data in the past week it is clear that Australia sticks out like a sore thumb, both in headline inflation and in underlying inflation despite the latter yet to really show much impact from the War. As a result, the RBA has had to hike rates this year when other central banks have held and has to continue to remain relatively hawkish. Unfortunately, the Budget did not make the RBA’s job any easier. While we expect the RBA to leave rates on hold at its June meeting as it waits to assess things, we continue to expect another hike in August. The money market sees a zero chance of a hike next month, but continues to expect a hike by year end.

The changes to negative gearing, the capital gains tax discount and the taxation of family trusts have received a lot attention, but a disappointing aspect of the Budget was that the changes were not assessed in the context of the overall income tax system. Even with access to these concessions the Australian income tax system was highly progressive with the top 10% of income earners paying 44% of income tax revenue being raised by Canberra and the top 20% accounting for 60%. The tax system should be progressive because the more you earn the more you should be able to contribute as a share of your income. But there is a danger in pushing it too far in that it risks creating a disincentive to work, form new businesses and expand to employ more people. And now with the concessions wound back it will become even more progressive adding to these disincentives risking weaker productivity growth and living standards. This risk is particularly high for start ups and small businesses and even if they are excluded from the CGT change the risk could remain in relation to less capital being available for growth stocks on the share market.

In short, the curtailment of the tax concessions should have been accompanied by income tax cuts or at the very least a commitment to indexing the tax scales to inflation. This is particularly the case with the top tax rate being above that in many other comparable countries and kicking in at a relatively low multiple of average wages. See the next chart. If the top tax threshold had been indexed to inflation since it was last significantly raised in 2008-09 it would now be $280,000 and not $190,000, which means far more taxpayers today are now paying the top rate than was originally intended for them.

It’s a bit sad that Australia missed out on winning Eurovision (again) as Delta had such a good song – better than Bangaranga. Here is La La La, the winner from 1968 which came from Spain – apparently the original singer of the song was Catalan and was switched out for Massiel at the last minute because he insisted on singing in Catalan which might not have gone down well with President Franco. This is covered in The Song Contest on SBS. It’s also amazing to see that Eurovision had a full orchestra back then. This was mandatory until 1998 – but it then went electronic and pre-produced.

Major global economic events and implications

Developed country PMIs for May showed a further whiff of stagflation with slightly weaker business conditions and higher price pressures. The weakness in activity was concentrated in Europe and Japan, but with manufacturing holding up and services down.

The US composite PMI is continuing to hold up a bit better – helped by the US’ status as a net oil exporter – but high & still rising price indicators are a problem for the Fed.

Other US economic data was mixed. In contrast to the PMI, manufacturing conditions in the Philadelphia region fell in May. While home builder conditions rose in May and housing starts rose in April, permits fell and all remain soft not helped by the ongoing rise in mortgage rates. Meanwhile, jobless claims remain low.

With Nvidia having reported, the US March quarter earnings reporting season is now largely over and profits have boomed. 95% of S&P 500 companies have now reported with 82.1% beating expectations and earnings growth for the quarter has now moved up to 29%yoy, up consensus estimates for a 14%yoy rise at the start of the reporting season. This is the strongest pace since 2021. Tech has led the charge with earnings growth around 61%yoy. Nvidia reported sales growth of 85%yoy and earnings growth of 129%yoy, both of which beat expectations but the market was hoping for more with its shares down 1.8% after reporting.

Canadian inflation rose less than expected to 2.8%yoy in April with the underlying measures around 2%yoy. This likely leaves the BoC in no hurry to raise interest rates from 2.25%. This contrasts dramatically with the situation facing Australia which has much higher inflation but note that Canada’s unemployment rate is 6.9%, well above Australia.

Similarly UK inflation in April was also less than expected falling to 2.8%yoy at the headline level with core inflation falling to 2.5%. As with the BoC this likely leaves the BoE in no hurry to hike, particularly with unemployment at 5%.

Japanese March quarter GDP was stronger than expected at 0.5%qoq with modest increases in consumption and business investment and a strong contribution from trade. Japanese inflation slowed to 1.4%yoy in April with broad based softness and core inflation slowing to 1.1%yoy which should keep the BoJ gradual in hiking.

China’s economic activity softened across the board in April. Retail sales growth slowed to just 0.2%yoy with a sharp fall in gold and jewellery sales, and the end of subsidies impacting the sale of household appliances. Property investment and sales continue to fall but at least the pace of decline in home prices slowed. The slowdown appears to reflect a payback after a strong March quarter and some policy tightening but the Government is likely to keep growth muddling along around 4.5%yoy.

Australian economic events and implications

Jobs data for April was soft but may have been distorted. Employment fell by 18,600, with unemployment rising to 4.5% its highest since 2021 and participation fell. However, it wasn’t all weak with hours worked up strongly and it may have been distorted by Easter and school holidays and a new data collection method by the ABS. What’s more female employment fell by 32,000 with the fall concentrated in Queensland where unemployment spiked from 3.7% to 4.2% which looks dodgy and subject to reversal next month. The softness in April may be a sign of a softening jobs market on the back of rate hikes and the oil shock, and we expect a further rise in unemployment but the weakness in April could just be statistical noise and so we will need to see May’s data to get a clearer picture.

Job vacancies are down from their highs but are at okay levels and may have been starting to bottom. So the RBA is likely to continue to characterise the jobs market as slightly tight.

Australian business conditions PMIs for May continued to show weak economic conditions as rate hikes and the oil supply shock impact. New orders and employment were both down sharply. At the same time the input and output price indicators remain around 2022 levels.

Consumer confidence improved slightly in May according to the Westpac/MI survey with lower fuel prices and Budget talk of small income tax cuts – but it remains very weak with the alternative ANZ/Roy Morgan index looking even weaker. The rise in confidence was amongst younger age groups suggesting a positive reaction to the changes to negative gearing and capital gains tax, whereas there was little change in confidence amongst those aged 45 and over.

The weakness in consumer confidence if sustained is warning of weakness in consumer spending ahead.

The Westpac/MI consumer survey showed a fall in home price expectations, but consumers continue to see now as a very poor time to buy a dwelling

Consumer inflation expectations fell back in May with lower petrol prices but remain high.

What to watch over the next week?

In the US, expect consumer confidence to remain weak (Tuesday) but the trend growth in capital goods orders (Thursday) to remain strong with core private final consumption deflator inflation (also Thursday) expected to have increased further in April to 3.3%yoy.

The Reserve Bank of New Zealand (Wednesday) is expected to leave its cash rate at 2.25%, but signal hikes ahead.

In Australia, April inflation data (Wednesday) is expected to show a slowing to a 0.6%mom rise helped by flattish petrol prices partly due to the fuel tax cuts with annual inflation cooling to 4.4%yoy from 4.6%yoy in March. Trimmed mean inflation is expected to edge up though to 3.4%yoy as second round effects from the higher fuel prices start to show up consistent with the surge in price pressures evident in business surveys (see in the Australian section above). In other data expect a 0.9%qoq rise in March quarter construction activity (also Wednesday), a 1% rise in business investment for the March quarter and a slowing in April household spending growth to -0.7%mom/5.5%yoy (both Thursday) and signs of a slowing in housing credit growth for April (Friday) as rate hikes impact.

Outlook for investment markets

Global and Australian share markets have likely seen the worst from the War and oil shock if the flow of oil quickly resumes but the risk of further falls taking us to a 15% top to bottom correction remains high given uncertainty around the flow of ships through the Strait along with still stretched valuations, political uncertainty associated with Trump & the midterm elections and worries about private credit and the impact of AI. However, returns should still be positive for the year as a whole thanks to Trump still likely to pivot to consumer-friendly policies and solid profit growth.

Bonds are likely to provide returns around running yield.

Unlisted commercial property returns are likely to be solid helped by strong demand for industrial property associated with data centres.

Australian home price growth this year is likely to slow to around 3% and could go negative over the year ahead due to poor affordability, RBA rate hikes, reduced investor demand likely to result from the Budget moves to wind back negative gearing and the capital gains tax discount and the hit to confidence from the War.

Cash and bank deposits are expected to provide returns around 4.25%.

The $A is likely to rise as the interest rate differential in favour of Australia widens as the Fed holds then cuts maybe next year and the RBA hikes. Fair value for the $A is around $US0.72.

By Shane Oliver

The post Weekly economic and market update – week ending 22 May, 2026 appeared first on AdviserVoice.

Shane Oliver

Key points

• The oil supply shock remains a significant threat to economic growth and shares – particularly with the Strait of Hormuz remaining closed and oil reserves running down.
• It’s contributing to rising bond yields and putting pressure on share market valuations.
• The tax changes in the Budget will make shares and super relatively more attractive investments and favour high yielding over growth investments (ie, less risk taking).
• The Budget contains good moves to deregulate, but little real tax reform with public spending remaining too high.

Introduction

This note takes a look at some of the main questions investors have in a simple Q&A format, particularly around the oil supply shock, global bonds, China, the Australian Federal Budget and the RBA.

What happened to the oil supply shock?

While there was much angst when the US/Israel War with Iran led to the closure of the Strait of Hormuz at the start of March with a surge in oil prices, falls in shares and talk of a stagflation/risk of global recession, the fallout so far has been modest. In Australia, petrol prices are only just above where they were before the War began. What gives?

The global economy so far has been protected by the drawdown of oil stockpiles, the diversion of some fuel via other routes, fuel tax cuts, just in case buying, expectations that it will be temporary aided by Trump’s regular soothing comments to the effect it will soon be over and the AI boom in the US. However, the Strait is still closed, hopes for an imminent deal are fading and Trump is renewing his threats against Iran. Trump clearly wants to TACO but his threats have started to lose credibility. That’s always a risk when playing the “madman” in negotiations – and Iran looks happy to string it out. The trouble is that the world can’t keep running down oil stockpiles and sooner or later oil demand will have to adjust to a 10-15% reduction in global supply – with the International Energy Agency estimating global oil supply is down 13%. Rough estimates suggest this would require oil prices to rise to around $US150/barrel. Past experience tells us that oil crises impact oil prices, shares and economies with a long lag. For example, the full impact on oil prices unfolded over four months in the first oil shock in 1973 and over a year in the second oil shock in 1979. Hopefully, we are right and a deal is soon reached. If not, the risks of a much bigger boost to inflation/hit to growth will rise with a flow on to shares. The chart above shows that having overshot on the upside in March, Australian petrol prices have now overshot on the downside (even with the 32 cents fuel tax cut) & are at risk of rebounding.

Why are bond yields rising?

Rising bond yields reflect worries that rising oil prices will boost inflation, central banks will have to raise rates, the US budget deficit is blowing out and US capex remains strong with data centre spending. This is boosting borrowing costs for corporates and US home buyers and to a lesser extent for Australian home buyers by rising fixed mortgage rates.

Are shares expensive or cheap?

The rising trend in bond yields at a time of relatively high price to earnings ratios, particularly for US shares, leaves share valuations stretched with both US and Australian shares offering little risk premium over bonds. This has been the case for the last two years now so it’s no guide to timing, but indicates shares remain vulnerable if the news flow turns more negative.

What happened to the threat from US tariffs?

US tariffs have taken a back seat lately but are still bubbling away. The Trump Administration is now starting to pay out refunds for the reciprocal and Fentanyl tariffs the US Supreme Court declared illegal which could amount to $US166bn. This will lead to a temporary fiscal stimulus and budget deficit blow out. Those tariffs were then replaced with a temporary 10% tariff (under section 122) from late February that will expire on 24th July, but these have also been ruled illegal by the US Trade Court which will likely lead to another round of appeals. In any case they will likely be replaced by more permanent section 301 tariffs taking them back to where they were before the Supreme Court decision. Meanwhile from a peak of nearly 12% the average effective US tariff rate has fallen back to below 10% thanks to import substitution. It’s still way up on where it was at the start of last year…so still adding to US costs and distorting trade. Though, worst case scenarios have been avoided because other countries decided last year to take the “high road” and avoid a trade war with the US. And the trade truce between the US and China – extended by the recent Trump/XI summit – has avoided a trade war between the world’s two biggest economies (although the underlying structural tensions remain).

What about China?

China continues to face big challenges: a falling population; trying to get consumer spending to take over as a key growth driver; and political tensions with the West. The return of Trump last year saw a renewed flare up in tensions, but they have been defused with the trade truce. In the meantime, China simply diverted its exports to other countries. Chinese economic activity data was weaker than expected in April, but this looks like payback from stronger than expected March quarter growth. However, Chinese growth is likely to continue to muddle along with growth this year expected to be around 4.5%.

What does the Australian Budget mean for investors?

Because of the removal of existing property purchases from negative gearing, the shift to taxing real capital gains for all assets with a 30% minimum rate and the new minimum tax rate of 30% on distributions from discretionary trusts the Budget is the most consequential for investors in years. At a high level for investors this will:

• Reduce the after-tax return from investing in existing property.
• Favour new home builds over existing property (which means a narrower and potentially more problematic choice set).
• Boost the relative attractiveness of shares and commercial property relative to residential property as they can still be negatively geared.
• Favour high rental yielding residential properties over lower rental yielding properties as these are less dependent on capital growth.
• Favour high yielding assets over lower yielding growth investments.
• Make fixed interest and bank deposits relatively more attractive
• Make crypto and gold relatively less attractive as they are dependent on capital growth which will potentially now be taxed at a higher rate.
• Boost the relative attractiveness of super – because it retains its concessional tax treatment.
• Boost the attractiveness of the family home as it remains CGT free and could also be converted into a negatively geared investment property at some point. It could lead to more renovations.
• Make high turnover investment trading strategies less attractive because of potentially higher capital gains tax bills.

In short, the tax changes are likely to drive an increased focus on high yielding investments at the expense of those more focussed on capital growth which could mean a decline in risk capital in Australia.

How does the Budget stack up against my wish list?

Prior to the Budget, I produced a “wishlist” of the top five things needed in the coming Budget. These were to limit any “cost of living” relief, cut spending, undertake serious tax reform, less red tape and more incentives to invest, and to reform the Charter of Budget Honesty. On each of these:

• There wasn’t a lot of extra “cost-of-living” relief beyond the temporary fuel tax cut, with the $250 tax offsets more than two years away. This gets a tick.
• However, there was nowhere near the Keating like reduction in public spending that is necessary – $100bn or 2% of GDP over four years – to free up spare capacity in the economy and take pressure off inflation. Sure, there were spending savings later this decade – but these are dependent on the savings to the NDIS occurring as promised, no boost to spending ahead of the next election and still leave Federal spending well above pre-COVID average levels. And there is actually increased spending in the near term, so this gets a cross.
• There was a tilt at some tax reform, but this was more about tax hikes than tax reform. The Australian tax system should be moving from a very high reliance on taxing income to a greater reliance on taxing consumer spending in order to boost incentive and improve intergenerational equity. The Australian income tax system is also very progressive compared to other countries with a high top marginal tax rate kicking in at a low multiple of average earnings leading to the top 20% of taxpayers accounting for 60% of income tax paid, even with various tax concessions. See the next chart.

This in turn has motivated a high use of the tax concessions but, with their curtailment, the already very progressive nature of the tax system will become even more so. That will lead to further disincentive and work against the aim of boosting productivity. This may be compounded if the CGT changes lead to less capital being available for startups, private capital and growth stocks. Ideally the curtailment of the tax concessions should have been matched by lower income tax rates. So, it’s hard to tick the tax reform box so far.

• In terms of regulation and investment there were some good moves – with less red tape and moves to encourage investment mainly for small business. There was no move to unwind labour market re-regulation though. Overall, this gets a tentative tick.
• Finally, the Budget with its further boost to “off budget” spending – with actual budget deficit being $64.1bn more than double the $31.5bn underlying deficit that gets the focus – and an ongoing lack of fiscal rules continues to lack the discipline seen in times past.

Where does this leave the RBA?

The RBA is well aware that raising rates won’t make high oil prices go away but is rather responding to a pre-existing inflation problem in Australia – with underlying inflation around 3.3%yoy running well above target before the War – and seeking to make sure that the War does not make it a lot worse. The extra near-term stimulus in the Budget does not make the RBA’s job any easier but it’s not enough to change our prior expectations for the RBA to hike rates once more, probably in August. Through next year though, the RBA will probably be back to cutting rates.

By Dr Shane Oliver, Head of Investment Strategy and Chief Economist

The post Investment outlook Q&A – oil, bond yields, the Budget and the RBA appeared first on AdviserVoice.

Shane Oliver

Key points

• The key changes are a wind back in negative gearing, the taxation of real capital gains, numerous moves to reduce regulation, and modest net budget cuts over five years.
• The projected deficits are now slightly lower over the budget period by around $45bn, mainly due to more windfall revenue.
• With more stimulus in the near term though the Budget does nothing to make the RBA’s job in controlling inflation easier.
• The Budget continues to lock in structurally higher spending and budget deficits for the medium term.
• The tax changes look more like tax hikes than real tax reform and there is more work to do to boost productivity.

Introduction

This Budget is the most consequential in years given the Government’s committing to address poor productivity – and by implication stagnant living standards – while also dealing with the impact of the global oil shock and issues around intergenerational equity. As such it’s seeking to improve fairness, productivity and fiscal responsibility.

Key budget measures

Many of the key measures were pre-announced or leaked, but include:

• Negative gearing for new buys from now on restricted to new homes from 2027-28 onwards. For established homes losses can be used to offset other property income and can be carried forward. Shares and commercial property exempt from the change.
• The 50% capital gains tax discount to be replaced by the taxation of real gains from 2027-28 for all assets (with a likely exception for tech and startups) purchased from now and to face a minimum tax rate of 30%. CGT on existing assets to be assessed using a proportionate mix of the old and new tax models based on holding years. CGT on new builds given a choice of the old and new models.
• A minimum tax on discretionary trust distributions of 30%.
• A phased reduction of the EV fringe benefit tax break.
• Implementation of election promises with a 1% cut to the bottom tax rate (saving $5.15/week) & the $1000 standard tax deduction.
• A $250 income tax offset for all salaried workers for 2027-28.
• $20,000 instant asset write off for small business made permanent.
• Tax loss carry back so small biz can offset losses against past profits.
• The R&D tax credit expanded.
• Numerous moves to cut red tape with the aim of cutting regulatory costs by $10bn a year.
• Incentives & deals with states for productivity enhancing reforms.
• $2bn over 4 years to provide critical housing related infrastructure and $500m to speed up environmental approvals.
• $14bn in increased defence spending, $3.8bn for Melb rail project.
• $10.7bn “off-budget” to boost fuel reserves to 50 days plus.
• Gross spending cuts of $64bn incl NDIS, inland rail & public service.

Economic assumptions

Reflecting the impact of RBA rate hikes and the oil supply shock the Government sees inflation peaking at 5% and has revised down its growth forecasts for next year to 1.75% (from 2.25%) which is above the RBA’s forecast and implicitly assumes a smaller and short hit to growth from higher oil prices. The unemployment rate is still expected to reach 4.5%, unchanged from prior forecasts. As flagged in March it has also revised up its near-term immigration forecasts due to less departures but still seems a slowing to 225,000 in forward years which will slow population growth to around 1.3% pa.  The Government kept its medium-term iron ore assumption at $US60/tonne but pushed it out to March 2027. With iron ore above that, it’s still a source of revenue upside.

Still looking at big budget deficits

The Government is continuing to benefit from a windfall due largely to higher commodity prices (and hence resources profits) than assumed resulting in higher revenue. This is more due to good luck rather than good management. Compared to the projections in the December MYEFO this windfall – called “parameter changes” in the next table – is reducing the deficit over the five years to 2029-30 by another $37bn.  This table – nicknamed the “table of truth” – also shows how much of the windfall has been spent or saved (see the “new stimulus” line). The good news is that in this Budget all the windfall is being saved and then some, with the government saving more than it spends to the tune of $8bn over the period to 2030. But all of the “savings” are in the later years, with near-term years still showing more new stimulus than previously expected.

This in turn means that thanks to the good luck of the revenue windfalls and net policy tightening for later this decade the budget is now projected to be in better shape than previously expected with a surplus by 2036.

Gross public debt of nearly $1trn or 33% of GDP is projected to reach $1.2trn or 36% of GDP in 2028-29 before trending down.

Winners and losers

Winners include: wage earners, new and small businesses, first home buyers, venture capitalists, defence industry, and illegal tobacco users. Losers include: new property investors in existing homes, older investors with limited income, high growth investors, beneficiaries of discretionary trusts, NDIS rorters and some new electric vehicle users.

Assessment

This Budget represents a good move in the right direction:

• It’s the first budget under the current Government to see all the revenue windfall saved and net budget savings over the forward estimates. So in this sense it’s more responsible than the last few budgets.
• It’s a significant package of moves to deregulate and encourage more business investment which should help boost productivity.
• There are more measures to help boost housing supply.
• It includes tentative moves towards tax reform in regards to the tax concessions – which may go some way to reduce perceptions of unfair advantage by older generations when it comes to housing.
• There is more scope for upside revenue surprise with still cautious commodity price assumptions.

And the budget deficit and debt ratios are a fraction of the averages for comparable countries, with the debt/GDP ratio being around half.

However, the Budget has several significant weaknesses.

• Structural deficits. While the budget deficits are now smaller than projected, they continue out to mid next decade despite another round of revenue windfalls and new tax measures. This sees no money put aside for a rainy day over the forecast period until 2036 which is off in the never never. The ratcheting up of spending on temporary revenue windfalls in past budgets leaves the budget vulnerable to a reversal of the windfalls.
• Government spending was cut by far less than hoped leaving it higher than normal using up capacity in the economy. In the next two financial years net policy decisions have led to policy easing due to more spending. This arguably adds slightly to inflationary pressures in the economy rather than reduces them. And over the forward years policy has only tightened by $8.2bn due to increased revenue presumably flowing from the changes to tax concessions. And at a high level, Federal Government spending as a share of GDP over the next decade has been shaved only slightly to 26.5% from 26.9% in the December MYEFO this is still well above the pre-Covid average of 24.8%. This leaves little room for a pickup in private spending in the economy without hitting capacity constraints and higher inflation. And this is probably about as good as it will get as by next year’s budget we will bumping up against the next election where the pressure will be once again to ramp up spending.

• Reliance on bracket creep and higher taxes to return to budget balance. Revenue is projected to start trending up from 2028-29 reaching a record 27% of GDP by 2036-37 as bracket creep kicks in. The rising burden on Millennials & Gen Z is unfair and unrealistic. Politicians will eventually want to give some back as “tax cuts”. But then how will we get back to surplus then?
• Off budget spending. This remains a big issue as governments have been allocating increasing spending as “off-Budget” on the grounds that it’s an “investment”. This is resulting in a widening gap between the underlying cash balance (referred to above) and the headline balance (which includes “investments”). In fact, for the next financial year the headline deficit is projected to be $64.1bn compared to the underlying cash deficit of $31bn. However, much of this spending is not wise investment but it adds to public debt.

• Tax hikes are not tax reform. While curtailing access to tax concessions is a move in the direction of tax reform (as the CGT discount was arguably too generous and some rorted negative gearing) without addressing other failures in the tax system they amount to little more than a tax hike and are not tax reform. They have done nothing to ease Australia’s high reliance on income tax and will further add to the already very progressive nature of the Australian tax system – where the top 5% of taxpayers pay 32% of income tax collected and the top 10% pay nearly 50% – which will act as a further disincentive to work effort. Tax reform should be aimed at improving the tax system’s efficiency – so it distorts economic decisions and resource allocation less – by relying less on income tax and more on the GST. While income earned from assets may be taxed lightly relative to income earned as a wage and salary earner this should be addressed by lowering the taxation of income where our income tax rates are quite onerous compared to similar countries. Eg, the top marginal tax rate is well above the median of comparable countries and kicks in at a relatively low multiple of average earnings.
• More needs to be done to confidently boost productivity growth. To boost productivity growth – which is essential if we want to see faster growth in per capita GDP and hence living standards – the key things we need to see are: a reduction in the size of the public sector in the economy to free up resources for the more efficient private sector; tax reform to make the tax system simpler (so easier to comply with) and more efficient (so it distorts economic decisions less); and a range of reforms to make it easier for the private sector to grow and employ. The Budget saw some improvement but its modest overall: the public sector is still projected to remain larger than pre-Covid; the curtailment of the tax concessions may have boosted perceptions of fairness and improved simplicity but have done nothing to reduce the distortion to work incentive caused by our high reliance on income tax; and the moves to reduce regulation and encourage investment will help but there has been no move to address excessive labour market regulation. And “Future Made in Australia” subsidies run the risk of reducing productivity over time. So, all up there is likely a lot more to be done to confidently get sustainable productivity growth back to around 1.5% growth per annum.
• Housing. The changes to negative gearings and the CGT discount could result in a 5% of so fall in home prices in the short term as investors retreat due to a fall in the perceived after-tax return to property investment and this will no doubt be chalked up as a win for the policy change. But it’s doubtful that the moves will boost housing affordability much over the longer term – as the basic driver of this is a shortage of housing relative to underlying population driven housing demand. While negative gearing is to remain for new homes it’s likely to result in unintended consequences by eg making it harder for first home buyers to get into new housing. And policies that reduce investor interest in property overall will likely lead to less housing supply not more – with even the Budget papers estimating that the tax changes will reduce supply by 35,000 homes over a decade. Rather the focus should be on addressing the fundamental housing demand-supply imbalance, but the Budget is now projecting slightly higher immigration and so more demand and it’s not clear that it will improve supply despite the $2bn for new housing infrastructure and given the hit from the tax changes. The Government was right in its first term to focus on boosting supply but now two years into the Housing Accord goal to produce 240,000 homes a year we have been running around 60,000 below target and so making no inroads into the undersupply of housing which we estimate to be between 200,000 to 300,000 dwellings.

• Fairness. The move to wind back housing tax concessions may be popular with younger voters but its more about optics than fundamentals. Older generations have got the benefit of these tax concessions to grow their wealth and now they are being curtailed for the young! What’s more as noted above the property tax changes are unlikely to fix the undersupply of housing. The key ways to improve intergenerational equity are to: boost productivity growth so living standards grow at a rate older generations experienced; get the housing balance right with more supply and less immigration; and raise the GST so as to raise more tax from older self-funded retirees – and yes that will include one of us in a few years’ time! – and cut income tax in order to lower the tax burden on workers. And as already noted the tax hikes may also be judged unfair for older higher income workers because they amount to a tax hike at a time when the income tax system is already highly progressive.

Implications for the RBA

While the new $250 Working Australia Tax Offset is trivial and doesn’t kick in until 2027-28, the near-term fiscal easing shown in the “table of truth” above (ie $6.5bn over the year ahead) won’t make the RBA’s job any easier. Nor will the handouts already announced in various state budgets. That said, it’s not enough to change our base case for just one more RBA hike in August. However, with poor household and consumer confidence levels and the Budget unlikely to add much to economic growth in the near term along with the ongoing blockage of oil through the Strait of Hormuz risking a recession we remain of the view that the RBA will be cutting rates next year.

Implications for investors – negative gearing & CGT

The changes to negative gearing, the CGT discount and the minimum tax on trust distributions have potentially big implications for many investors. I will leave the details to those with more expertise regarding taxation, but the changes to negative gearing are probably the most significant with about 1.2 million taxpayers reporting a loss for tax purposes on property. However, whether the CGT discount change is significant going forward will depend on the interaction of the rate of property price growth and inflation. Since the introduction of the discount in 2000 it has been beneficial to most investors as asset price gains were high and inflation was low. But if we go back into a period where property price growth is more constrained (say 5% pa) and inflation higher (at say 3% pa) then under scenarios where the holding period is 12 years or less investors may actually end up better off.

Where the CGT tax change may bite is in relation to shares and businesses – particularly those which don’t meet any carve out for startups. The removal of the 50% discount could take the CGT rate for a high-income earner from the low end of comparable countries to the high end. This in turn could work against growth shares and small businesses and attracting talented workers to such businesses which could work against the Budget’s objective to boost productivity.

Implications for Australian assets

Cash and term deposits – no major implications.

Bonds – the projection for smaller medium term budget deficits imply slightly less upwards pressure on bond yields.

Property – the curtailment of negative gearing and the CGT discount by making property less attractive to investors could knock around 5% off property prices in the short term as investors retreat due to lower after tax returns. This is likely to be compounded by the backdrop of RBA rate hikes. However, the dip is likely to prove temporary as the supply imbalance reasserts itself.

Shares – since shares (and all assets apart from property) are not affected by the changes to negative gearing they will benefit as an investment destination relative to property. The CGT change will boost the appeal of high dividend stocks over growth stocks. Super will also benefit as an investment destination versus property as it tax rules are unchanged.

The $A – the Budget is unlikely to change the rising trend for the $A.

By Dr Shane Oliver, Head of Inv Strategy and Chief Economist & Diana Mousina, Deputy Chief Economist & My Bui, Economist.

The post The 2026-27 Budget – responsibility, productivity and fairness – or is it? appeared first on AdviserVoice.

It was a messy ride for global share markets over the last week as there was little progress towards fresh US/Iran talks and the Strait remained effectively closed to shipping with blockades from both sides. While US shares briefly made it to a new record high with good earnings results, they are down for the week along with Eurozone shares, but Japanese and Chinese rose are up. The messy global lead, bigger concerns about Australia’s vulnerability to an extended closure of the Strait of Hormuz and profit downgrades saw the Australian share market fall around 2% led by health, financial and mining shares. Global bond yields rose on concerns about higher inflation flowing from the continuing high level of oil and hence fuel prices.

The effective ongoing closure of the Strait of Hormuz to oil flows and the risk of a re-escalation of the War saw oil prices rise with West Texas rising to around $US96 a barrel and Brent around $US106. Oil futures pricing still points a to fall back in oil prices as the market continues to assume there will be a resolution soon but even for next year oil futures imply pricing settling at higher levels than before the War.

With worries about re-escalation and a longer closure of the Strait returning in the past week the risk off tone saw the $US tick up and the $A, gold and metals fall back a bit. That said Bitcoin and iron ore rose.

Another TACO Tuesday – our view remains that Trump wants to TACO and will find a way to stay on the off ramp from the War. But it all remains very messy and uncertain. Despite no more talks, Trump extended the ceasefire indefinitely on Tuesday (after saying he wouldn’t) to allow Iran to come up with a “unified proposal” but the Strait remains closed with Iran refusing to remove its blockade of ships from other countries until the US removes its blockade of ships to or from Iran. So, it’s at a standoff with occasional attacks on ships from each side to reinforce the blockade. What’s more Trump’s demeaning and humiliating social media posts may also be encouraging Iran to dig in. Uncertainty remains high but several things are apparent:

• There is still a significant risk that the War could re-escalate again if agreement on a deal is not reached soon. This could see the US expanding its bombing and Iran retaliating by hitting more ships in the Strait of Hormuz and getting the Houthi’s to do the same in the Red Sea. Maybe Trump’s ceasefire extension is just allowing a further military buildup. Share markets appear to be underestimating this risk.
• But, Trump by his actions has shown he wants to end the War and declare victory (however vacuous that victory may be). Pressure on Trump to back down remains very high with only a third of Americans supporting the War and his approval lower than Biden’s. As things stand the GOP could see a loss of both the House and the Senate in November, which could open the door to numerous Congressional enquiries and possible impeachment of Trump.
• And pressure on Iran to reach a deal is high as the US switch from bombing (which can unite a population) to even tougher economic sanctions via the blockade of Iranian oil exports will intensify popular discontent with the Iranian Government. And it may conclude that its ability to cause pain for the US by effectively blocking 20% of global oil supply means it has no need for nuclear weapons to ensure it survives. But Iran has a fractured unclear leadership and still has a relatively strong hand.
• Which means that some sort of deal to end the War and reopen the Strait is more likely than not but that it could be a low quality deal – leaving the regime in place aided by an easing in sanctions but more aggressive than ever (with the new Ayatollah reportedly losing multiple family members in Israeli/US attacks) and arguably more powerful with its now proven control of the Strait. So, 6000 lives and $US40bn plus in war costs later, the War may not have achieved much, meaning it could all flare up again down the track if there is a deal.

The key to watch remains the Strait of Hormuz and despite a brief spike in ship traffic it remains effectively closed. While a bout of mild stagflation is baked in the clock is now ticking on whether this turns into a more severe bout like that seen in the 1970s. So far we have been able to get by because refineries still had oil to refine from ships that left in February and could rely on reserves but the longer it stays shut the more the global and Australian economies will have to face the consequence of the 10-15% reduction in global fuel supply its resulting in – which would mean even higher fuel prices (a rough calculation is that oil would need to go to around $US150/barrel) and fuel restrictions.

So, if our base case is right that Trump will stay on the off ramp and soon find way to get the Strait open then share markets have more upside.  Particularly, with US March quarter earnings growth likely to come in at a strong 18%yoy.  But, the risk of a renewed spike in oil prices and more volatility in shares remains high if a deal is not reached soon and the Strait if not reopened. So it remains a time for caution for those investors with a short time horizon.

This presents a very uncertain outlook for global central banks with five – including the Fed and ECB – due to meet in the week ahead. We expect all to leave rates on hold as they continue to assess the impact, but most are likely to remain biased to the upside on rates based on the experience of the 1970s oil shocks which suggests that the key is to initially focus on keeping inflation expectations down rather than cutting rates to support employment.

In Australia, we expect the RBA to hike again in May as inflation was already more problematic here and March inflation data to be released in the week ahead will reinforce this. It seems that its not just higher fuel prices and fuel levies that are on the way up but everything from airfares to toilets.

And here’s a happy song for my sister Tracy.

Major global economic events and implications

Developed country PMIs for April showed a further whiff of stagflation with slightly weaker business conditions and higher price pressures. The weakness in activity was concentrated in Europe and Japan, but with manufacturing up and services down. Both input and output price pressures rose further to levels last seen in 2022. So, a whiff of stagflation, but so far its mild and not indicating recession – at least not yet.

The US composite PMI improved in April. It’s below last year’s highs but its relative resilience highlights that the US is less impacted by the oil shock being a net oil exporter. Input price pressures remain elevated, and output prices rose to their highest since 2022.

US retail sales for March suggest that the consumer remains resilient despite the surge in gasoline prices and falls in confidence. A 15.5% surge in gasoline prices drove retail sales up 1.7%mom, but underlying retail sales rose a solid 0.6% for the second month in a row although this was likely also boosted by high goods price inflation. Meanwhile, jobless claims remain low.

It still early days in the US March quarter earnings reporting season with only around 26% of S&P 500 companies reporting so far but results have been strong with 79.5% beating expectations and consensus earnings growth for the quarter moving up from 14%yoy to 15%% and likely to end up around 18%yoy, which will be the strongest in five years. Tech companies are again leading the charge with earnings growth around 32%yoy.

Fed in wait and see mode and unlikely to change much under Kevin Warsh. Some guide to a Warsh Fed was provided by his Senate hearing. At a high level Warsh is committed to Fed independence, he may put more weight on the AI transformation and less on employment (but this may lead to the same thing for rates), he may put more weight on the trimmed mean and median measures of inflation than the core PCE (although this may be seen as cherry picking because they are lower at present because they screen out more of the impact of tariffs), he leans towards lower rates but a smaller Fed balance sheet and he leans towards less communications and forward guidance from the Fed (which may be good). Overall, he probably leans a bit more dovish that Powell but not radically so. In the near term like others on the Fed he looks like he would lean to waiting to see the impact of the War on inflation and in any case he has to bring the rest of the Fed along with him. And on that front Trump appointees Waller, Bowman and Miran have all become less dovish. In the meantime, he may not get to the Fed for a while because GOP committee member Tillis is still refusing to vote on him until the DoJ action against Powell is dropped.

Canadian inflation rose to 2.4%yoy in March with a 21% rise in petrol prices, but underlying measures were a bit softer around 2%yoy, suggesting that the Bank of Canada can look through the headline inflation spike for now.

It was a similar story in the UK with headline inflation rising to 3.3%yoy with higher fuel prices, but underlying inflation was pretty steady, albeit at still high levels. The Bank of England is also expected to hold rates for now.

Eurozone consumer confidence plunged in April pointing to weaker consumer spending ahead.

Japanese inflation in March also rose but only to 1.5%yoy. Core inflation was unchanged at 1.4%yoy, leaving no reason for the BoJ to rush into another rate hike.

New Zealand inflation rose to 3.1%yoy in the March quarter, but of course its only showing one month of the War’s impact. Underlying inflation measures are mostly a bit above the 2%yoy inflation target midpoint with business surveys pointing to higher inflation ahead. The money market expects three RBNZ rate hikes this year.

Australian economic events and implications

Business conditions PMIs for April showed further signs of stagflation. The business conditions PMI rebounded after a very sharp fall in March but only to a soft 50.1 which leaves it well below prior readings, with orders remaining well down. At the same time the input and output price indicators rose to around 2022 levels.

With housing related inflation being a big part of Australia’s inflation problem, the RBA won’t take much comfort from the next chart showing SQM’s measure of asking rents pointing to higher rent inflation in the CPI.

Meanwhile, it was welcome news to see the Federal Government moving to rein in the rapid growth in spending on the NDIS. A blowout in government spending as a share of the economy by leaving less room for private spending and acting as a drag on productivity growth has been a major reason behind Australia’s cost of living and inflation problem and the blowout in spending on the NDIS has been part of that. The NDIS is a great program, but it has grown much faster than originally anticipated to be now bigger than Medicare. With this has come explosive growth in health care and social assistance jobs (which have risen by about 2 percentage points as a share of total employment over the last four years). If the NDIS is not reined in there is a danger that it could lose its social licence, particularly with increasing reports as to how it’s being rorted. This is what happened to relatively unrestricted unemployment benefits in the 1980s and gave rise to the term “dole bludger”.

If the Government can deliver on its announced NDIS savings, spending on it should stabilise as a share of GDP.

What to watch over the next week?

The week ahead will see major central banks – including the Bank of Japan (Tuesday), the Fed and Bank of Canada (Wednesday) and the ECB and Bank of England (Thursday) – all leave interest rates on hold as they continue to assess the boost to inflation flowing from the higher fuel prices against the drag on growth. While the Fed is still expected to cut rates this year its unlikely till later this year and other central banks are expected to raise rates

In the US expect a fall in consumer confidence but continued modest growth in home prices (both Tuesday), the trend in capital goods orders to remain up but housing starts to fall 6% (both Wednesday). March quarter GDP data to show growth picking up to 1.2% annualised and the manufacturing ISM for April (Friday) to show a slight fall and continued solid rises in prices. Core PCE inflation for March (Thursday) is likely to have increased to 3.2%yoy. The US March quarter profit reporting season will continue.

Eurozone March quarter GDP data (Thursday) is expected to show growth of just 0.2%qoq slowing to 0.9%yoy. Inflation data for April (Thursday) is expected to show a further rise to 2.9%yoy due to rising energy costs but with core inflation falling to 2.2%yoy. Unemployment for March is expected to have remained at 6.2%.

Chinese business conditions PMIs (Thursday) for April are expected to remain around the 50.5 level.

In Australia, the focus will be back on inflation with the release of inflation data for both the March quarter and the month of March expected to show a further rise at the headline level. Thanks to a roughly 30% rise in fuel prices in March, the monthly CPI is expected to rise 1.6%mom or 5.1%yoy, from 3.7%yoy. The March quarter CPI won’t show the full impact as petrol prices only surged in March but will likely also accelerate to 1.5%qoq or 4.2%yoy, up from 3.6%yoy, as electricity prices surged in January with the end of government rebates and medical costs rose sharpy. Trimmed mean, or underlying inflation, will be more benign but still well above target at 3.5%yoy in the month of March and 0.9%qoq or 3.5%yoy in the March quarter. It’s too early for the much of the flow on of higher oil prices to show up in underlying inflation via fuel levies, higher fertiliser costs and higher costs for other materials derived from oil but this will show up in the months ahead, with the NAB and PMI business surveys confirming a sharp rise in cost and price pressures in March and April. With the surge in inflation threatening a further rise in inflation expectations and wages claims likely further pushing out the RBA’s expectations for when inflation will return to target we expect the RBA to hike rates again, probably at its May meeting. However, with a collapse in confidence pointing to a hit to growth we remain of the view that it will be a close call and put the probability of a hike versus a hold at 60/40.

Outlook for investment markets

Global and Australian share markets have likely seen the worst from the War and oil shock if the flow of oil quickly resumes but the risk of further falls taking us to a 15% top to bottom correction remains high given uncertainty around the peace talks and flow of ships through the Strait along with still stretched valuations, political uncertainty associated with Trump & the midterm elections and increasing worries about private credit and the impact of AI. However, returns should still be positive for the year as a whole thanks to Fed rate cuts likely later in the year, Trump still likely to pivot to consumer-friendly policies ahead of the midterms and solid profit growth.

Bonds are likely to provide returns around running yield.

Unlisted commercial property returns are likely to be solid helped by strong demand for industrial property associated with data centres.

Australian home price growth is likely to slow to around 3-5% due to poor affordability, RBA rate hikes and the hit to confidence from higher fuel prices and the War.

Cash and bank deposits are expected to provide returns around 4.25%.

The $A is likely to rise as the interest rate differential in favour of Australia widens as the Fed cuts and the RBA hikes. Fair value for the $A is around $US0.72.

By Shane Oliver

The post Weekly economic and market update – week ending 24th April, 2026 appeared first on AdviserVoice.

Global share markets rose further over the last week on optimism for a peace deal with Iran, with US and Japanese shares rising to record highs. Despite the positive global lead, Australian shares fell back slightly resulting in a fall of around 0.4% for the week reflecting concerns about a bigger boost to inflation in Australia and a bigger hit to economic growth as highlighted by sharp falls in consumer and business confidence and expectations that the RBA will raise rates again and remain more hawkish compared to other countries. While the ASX saw gains in IT and property shares this was offset by falls in financials and industrials.

Global bond yields fell slightly but rose in Australia.

Oil prices fell a bit further but still remain around $US95 a barrel with the hit to oil supply continuing.

The continuing risk on tone saw the $US fall and the $A rise to its highest since 2022, with gold, metal and iron ore prices also up along with Bitcoin.

On the road to peace with significant pressure on both the US and Iran to cut a deal – and share markets have been moving to factor this in. Despite the collapse of the initial US/Iran peace talks last weekend and the US blockading Iranian ships through the Strait which will further restrict global oil supplies, optimism regarding an end to the War was fuelled again in the last week by signs of renewed talks and an extension of the ceasefire with Trump saying prospects for a deal with Iran are “looking very good.” We continue to lean to the view that Trump will find a way to stay on the off ramp from the War. Pressure on Trump to back down remains very high with only a third of Americans supporting the War and his approval rating running below where it was 8 years ago and lower than Biden’s, because his policies including the War are worsening the affordability concerns that saw him elected in 2024. The Republicans are seeing increasing odds that they will lose both the House and the Senate in the midterms. And likewise, pressure on Iran to reach a deal is high as the US switch from bombing (which can unite a population) to even tougher economic sanctions via the blockade of Iranian oil exports will intensify popular discontent with the Iranian Government. And it may conclude that its ability to cause pain for the US by effectively blocking 20% of global oil supply means it has no need for nuclear weapons to ensure it survives. So its understandable that share markets have bounced back. This has ranged from a 70% recovery of the falls in Australia to a rebound to record highs in the US and Japan, with US shares moving to factor in another run of strong profit growth for the March quarter with earnings growth expectations running around 14%yoy.

However, there is a risk that shares may have run a bit ahead of themselves – particularly in the US where they are now at new record highs:

• There is still a high risk that the War could re-escalate again – with the US expanding its bombing and Iran retaliating by hitting more ships in the Strait of Hormuz and getting the Houthi’s to do the same in the Red Sea.
• The flow of ships through the Strait while up from its lows remains a fraction of normal levels so the hit to global oil supply continues.

• A bout of stagflation – higher inflation and weaker growth – is already baked in in the near term as even if there is a quick and sustained increase in ships flowing through the Strait it will take several months for global oil and related product flows to return to normal.
• The global economy is now getting closer to crunch time regarding the supply of oil – as the last ship load of oil to leave the Gulf before the War started is now getting refined into fuel and the longer the hit to oil supply continues the greater the risk of the global economy moving beyond a short term bout of stagflation into a recession along the lines flagged by the IMF.
• Australia is particularly vulnerable as it imports 80-90% of its fuel. Our rough estimate is that if the flow of oil through the Strait does not quickly resume we could survive till late next month but beyond that fuel rationing would likely be required which would mean a direct reduction in economic activity and the likelihood of recession. Disruption to production at the Geelong refinery due to a fire highlights the risk for Australia, although its looking like it won’t affect fuel supply and production could be back to normal in a few weeks.
• And even if a deal is reached to end the War and reopen the Strait the quality of that deal will be important. Because if the US just quits and leaves Iran more aggrieved and, in some ways, more powerful than ever, it could all flare up again – maybe after the US midterm elections are over.

So, the risk of a renewed spike in oil prices and more volatility in shares remains high. Historically the pattern of weakness in midterm election years in the US, which on average has seen a 17% top to bottom fall in shares, starts around now and runs out to around October. Any renewed weakness in US shares would affect the Australian share market. As such, it remains a time for those with a short-term investment horizon to remain cautious.

A supply side shock – which both adds to prices and detracts from economic activity – presents tough choices for central banks but the experience of the 1970s oil shocks which contributed to higher inflation and inflation expectations suggests central banks will likely initially focus on the hit to inflation – biasing interest rates to the upside rather than the downside. Consistent with this market expectations for major central banks policy rates have increased since the War started, with only a 33% chance of a rate cut priced in for the US down from more than two rate cuts expected prior to the War and Europe, the UK and Canada now all expected to raise rates this year.

In Australia, we expect the RBA to hike again but it’s a very close call. The challenge facing the RBA was highlighted by Deputy Governor Hauser who noted that the risks to inflation “might still be on the upside, in which case we’re going to have to respond. But we do also need to take account the of the possibility that activity slows.” But his urging of governments to support central banks in undertaking unpopular rate hikes to lower inflation could also be interpreted as preparation for another rate hike. Inflation expectations, wage pressures and cost and price pressures as flagged in business surveys have all moved up since the War started and March data highlights that the labour market was tight going into the War all of which biases the RBA towards more rate hikes. But against this, the labour market is a lagging indicator and slumps in business and consumer confidence point to weaker economic conditions ahead which will dampen inflation eventually. In the near term we think the RBA will give primacy to the increased threat to inflation and so see another rate hike in May. But it can’t ignore the potential hit to economic growth, so the May RBA meeting is a close call, and we put the probability of a hike versus a hold at 60/40. Market pricing for a 74% probability of a hike in May looks too aggressive though and if the RBA does continue hiking, we see it cutting next year.

Major global economic events and implications

US economic data was again a mixed bag.  Industrial production fell in March, but manufacturing conditions in the New York and Philadelphia regions improved sharply in April. Jobless claims also fell and remain low. Against this small business optimism fell and housing indicators remained depressed with falls in existing home sales and home builder conditions not helped by a rise in mortgage rates. Meanwhile, the Fed’s latest Beige Book of anecdotal evidence for April suggests a limited impact of the War so far on economic activity, but stronger cost pressures and uncertainty weighing on investment and hiring.

While US producer price inflation in March rose less than expected, key components from it along with the CPI point to a rise in core private final consumption inflation to 3.2%yoy in March from 3%yoy in February. And the regional manufacturing surveys show a sharp rise in cost pressures.

Uncertainty around the Fed continues, with Trump again threatening to sack Powell, but markets see little impact. The Senate Banking Committee hearing to consider Trump’s nominee Kevin Warsh as the new Fed Chair is set for 21 April, but GOP committee member Tillis is still refusing to vote on him until the DoJ action against Powell is resolved which it looks like it won’t be any time soon, so Warsh looks unlikely to be approved by the 15 May expiration of Powell’s term which probably means Powell stays on as Chair for a while.  However, Trump is saying he will sack him if he doesn’t step down on 15 May. Markets are no longer responding much to this as: Trump unlikely has the power to follow through on his threats; even if the courts agree that Trump has the power to replace Powell as interim Chair he would most likely be replaced by the Vice-Chair who has similar views; and once Warsh takes over (assuming he does), the Fed under his leadership is unlikely to take a different approach to rates in the near term than under Powell. At a broader level were it not for Trump’s tariffs and now the War which also threatens higher inflation for longer the Fed probably would have cut rates more by now. So, the main brake on rate cuts has been Trump himself!

China’s economy doing better at the start of the year. March quarter GDP rose 1.3%qoq which took annual growth to 5%yoy.  Growth in industrial production and investment in March were stronger than expected but retail sales were weaker. Cutting through monthly volatility all have seen some improvement since late last year. And home price falls have slowed. Policy measures are likely still needed to boost consumer spending and the housing sector, but they are likely to remain incremental unless the oil supply shock goes on for longer than expected.

Chinese export growth plunged in March after booming 20%yoy in January and February, but the volatility likely reflects distortions due to the timing of the Lunar New Year. Exports to the US remain depressed with exports to other countries filling the gap. Import growth accelerated even further but appears to reflect more trading days this March.

Australian economic events and implications

After a messy February, jobs data for March was solid, with solid growth in employment and hours worked and unemployment and underemployment unchanged. While unemployment is in a mild rising trend it remains low versus recent decades as does underemployment.

Job vacancies are down from their highs but are at okay levels and may have been starting to bottom. So the RBA is likely to continue to characterise the jobs market as slightly tight. However, the jobs data even up to March is now pretty dated given the likely hit to growth flowing from higher fuel prices and the oil supply shock. Going forward we expect this to result in higher unemployment.

The rise in petrol prices and all the talk of higher inflation has seen consumer inflation expectations spike to 5.9%, its highest since 2022. So far wage growth expectations have not picked up but the ACTU is calling for a 5% rise in minimum and award wages and is likely to now revise it higher so the risks to wages growth are skewed to the upside. This will worry the RBA as it raises the risk higher cost and price pressures will become more entrenched.

The impact of the surge in energy and other costs associated with the War is also evident with the NAB survey showing a surge in purchase costs and final product prices. This will add to RBA concerns, particularly as the price and cost indicators in the NAB survey had been heading in the right direction.

However, the Iran War has also hit consumer and business confidence very hard. The Westpac/Melbourne Institute’s consumer confidence index plunged 12% in April taking it back to around pandemic and 2022 rate hike lows with the decline being broad based across components and across mortgage holders, outright homeowners and tenants. Consumers are also now expecting a sharp rise in unemployment. The alternative ANZ/Roy Morgan index is even weaker at record lows.

While the link is not always reliable, the plunge in consumer confidence if sustained is warning of weakness in consumer spending ahead.

While the latest NAB business survey showed okay business conditions, business confidence also plunged with worries regarding the impact of the War.

So, it’s a hard balancing act for the RBA!

What to watch over the next week?

Business conditions PMIs for April to be released Thursday for developed countries including Australia are likely to show further signs of stagflation with another slump in conditions and confidence and a further rise in cost and price pressures reflecting the impact of the supply shock flowing from the War.

In the US, expect a solid 1.2% rise in March retail sales (Tuesday) due to higher gasoline prices, but underlying retail sales growth to be soft. The US March quarter profit reporting season will continue. Consensus expectations are for 14%yoy earnings growth, but this is likely to end up around 18%yoy, which will be the strongest in four years.

Canadian inflation for March (Monday) is likely to spike 1.1%mom to 2.6%yoy, but with the core inflation measures remaining around 2.3%yoy.

UK inflation for March (Wednesday) is likely to spike for the same reasons to around 3.8%yoy from 3%yoy, but again with core inflation remaining around 3.2% for now.

It will likely be similar in New Zealand (Tuesday) with March quarter CPI inflation likely to rise 0.9%qoq but falling to 2.9%yoy.

Japanese inflation for March (Friday) is likely to rise to around 1.5%yoy, with core inflation around the same level.

Outlook for investment markets

Global and Australian share markets have likely seen the worst from the War and oil shock if the flow of oil quickly resumes but the risk of further falls taking us to a 15% top to bottom correction remain given uncertainty around the peace talks and flow of ships through the Strait along with still stretched valuations, political uncertainty associated with Trump & the midterm elections and increasing worries about private credit and the impact of AI. However, returns should still be positive for the year as a whole thanks to Fed rate cuts likely later in the year, Trump still likely to pivot to consumer-friendly policies ahead of the midterms and solid profit growth.

Bonds are likely to provide returns around running yield.

Unlisted commercial property returns are likely to be solid helped by strong demand for industrial property associated with data centres.

Australian home price growth is likely to slow to around 3-5% due to poor affordability, RBA rate hikes and the hit to confidence from higher fuel prices and the War.

Cash and bank deposits are expected to provide returns around 4.25%.

The $A is likely to rise as the interest rate differential in favour of Australia widens as the Fed cuts and the RBA hikes. Fair value for the $A is around $US0.72.

The post Weekly economic and market update – week ending 19 April, 2026 appeared first on AdviserVoice.

Shane Oliver

Key points

• Uncertainty remains high over the US/Iran War with a ceasefire declared but no agreement in talks so far. Tensions continue to remain high and oil flows remain restricted, with Trump announcing his own blockade on the Strait of Hormuz. But pressure on Trump to back down on the War is very high.
• A stagflationary hit of higher inflation and weaker growth is now baked in with the uncertainty being how long it’s sustained. The flow of ships through the Strait of Hormuz remains the key – as it has been since day one of the War.
• Beyond the near term uncertainty, there are likely to be nine key longer term consequences of the War: higher prices and inflation; escalated geopolitical risk; a renewed global terrorist threat; increased defence spending; increased spending on oil and gas infrastructure; increased focus on renewables and nuclear energy; more pressure to onshore supply chains; yet another reminder that the world is now more crisis prone; and bigger government and more public debt.
• This is all flowing from and reinforcing the rise of populism. Over the long term this risks weaker growth, more inflation prone economies and more volatility which should mean higher risk premiums and risks lower investment returns.

Introduction

The past week provided welcome relief in the Iran War, with Trump delaying for two weeks his threat of the “complete demolition” of Iran’s power plants and bridges. So far its all very shaky, but whether the “ceasefire” holds or not and the War de-escalates or escalates from here, there will be significant long-term implications, beyond the near term stagflationary impact that already looks likely this year. The long-term implications will mostly serve to reinforce existing trends towards deglobalisation, increased geopolitical risk, even bigger government and higher inflation pressures.

TACO time – the current state of the War

Trump’s decision to backdown and announce a ceasefire was consistent with his pattern of making exorbitant demands then backing down as pressure grows intense. This time around his poll support was collapsing, markets were threatening to riot, and he was in a no-win situation with Iran. It clearly has plenty more missiles and drones and, if he escalates, it would use them, worsening the global impact. While Trump has military superiority, Iran has weaponised the Strait of Hormuz to control global oil supplies. So, it is a sort of MAD – mutually assured destruction – stand off from which Trump ideally has to back down. Renewed US/Iran talks have failed to reach agreement, with Trump declaring “whether we make a deal or not makes no difference to me. And the reason is because we’ve won”. But then he announced a new contradiction – the US will itself block shipping in the Strait, but at the same time its Navy will begin demining it! Of course he may soon say something completely different. Overall, we lean to the view Trump will find a way to keep the ceasefire going given the political pressure he is under, but uncertainty is high.

For now, the Strait remains the key, because the last ships that made it through at the end of February are now reaching their destinations meaning refineries in Asia will soon start to run low on oil to refine. So the resultant 10-15% hit to global oil supply (after allowing for diversions, eg, via the Saudi East-West tunnel) will start to bite this month. All of which risks a renewed surge in oil prices – to maybe around $US150/barrel in order to curtail consumption – and plunging share markets.

The nascent pick up in the flow of shipping could resume. But if this comes with Iran and/or the US controlling the flow (with fees and vetos) it will be an unstable solution – as the rest of the world won’t accept such an outcome indefinitely, given the precedent it will set. This would point to a resumption of the conflict. Maybe after the midterms are over, when Trump is less politically constrained, or if his and Republican polling gets so bad that he has nothing to lose by escalating again.

Even if there is a quick end to the War it will take months for global oil flows to return to normal given the time it will take to resume energy extraction in the Gulf (weeks & months for oil, years for some gas plants), to then load this on to ships and for those ships to arrive at refineries in Asia. And then for the refined products to reach Australia.

So, a near term stagflationary impact of higher inflation and weaker growth is now baked in. In Australia, we see inflation peaking around 5-5.5% in the current quarter and GDP growth slowing to around 1.5% this year. With oil supplies coming to crunch time this month the risk of recession in Australia is now high. For central banks wary of letting inflation expectations rise, the focus is likely to be initially on the boost to inflation rather than the hit to growth. This is the case in Australia where inflation was already well above target and signs of rising wage demands will worry the RBA. So, we are allowing for more RBA rate hikes this year.

The longer-term consequences

Beyond the uncertain short term stagflationary impact the War will leave a longer-term impact on economies and markets in nine key ways.

1. Higher prices, inflation and inflation expectations – having another hit to supply and boost to inflation so soon after the last one in 2022 and on top of the tariff impact in the US will lead to another leg up in prices. This runs the risk of a further boost to inflation expectations and loss of faith in central banks’ ability to get inflation back to target.
2. Increased geopolitical risk – this has been on the rise ever since the 2010s due to a loss of faith in liberal democracy reflecting rising inequality, increasing nationalism and populism and a shift away from a unipolar world (dominated by the US) to a multipolar world. The US has gone from chief defender of liberal democracies to a force propelling this shift under Trump with his focus on doing what he wants for America, trashing the global rules-based system, attacking allies (and treating them as scapegoats for his mistakes on Iran) and acting like a “madman” which is leading to a loss of credibility for the US. This has been particularly evident this year with the US intervention in Venezuela, attempt to take Greenland (which he is still on about) and now Iran. It’s hard to see this not being interpreted by other powerful countries as a green light to do whatever they want in their region and beyond. I would rather Ray Dalio’s assessment that the world is heading down a path that risks broader conflict be wrong, but it can’t be ignored. What’s going on now with Iran is the sort of thing that world wars start over.
3. A new generation of terrorists – the Israel/Gaza war and now the Iran War risk driving a renewed rise in terrorism. Economies and markets can look through terror attacks that are limited in impact – as we saw in the 2000s – but this would change if the damage was more general.
4. Increased defence spending – this is an inevitable result of increased geopolitical risk. It will also be fuelled by Trump’s renewed contradictory attacks on NATO countries and other allies including Japan and Australia – for not joining in on the attack on Iran. Particularly so if the US decides to leave NATO as it’s been alluding to.
5. Increased spending on oil and gas infrastructure – while Trump appears to have been surprised and frustrated by Iran’s move to control the Strait of Hormuz (through which 20% of global oil and gas flows) as evident in his “Open the F…… Strait, you crazy bastards” comment, it’s entirely logical and had long been predicted if Iran found itself threatened. It was why Saudi Arabia built its East-West oil pipeline in the 1980s. Now that it’s happened, it provides yet another reminder of the global energy dependency on a highly volatile part of the world. This was on display in the 1970s but was forgotten about from the 1980s as oil shocks were brief. It’s likely to mean increased efforts by Gulf countries to bypass the Strait and medium term moves by other countries to boost their own oil and gas reserves.
6. Increased focus on renewables and nuclear energy– over the longer term the crisis will further boost demand for renewables and nuclear on the simple logic that the sun, the wind and nuclear energy do not depend on volatile politics in the Middle East. This is already evident with motorists reportedly scrambling to buy electric cars (which are now around 15% of new car sales in Australia).
7. Yet more pressure to onshore supply chains – this is on top of the pressure flowing from the pandemic for medical equipment but will now focus on oil refining, aluminium, fertiliser etc which are all being impacted by the War. Future Made in Australia will likely see another leg up. Which all means more protectionism and deglobalisation.
8. Yet another reminder that it’s now a more crisis-prone world – the Iran War is now the fifth major global shock in the last 20 years with the others being the GFC, the Eurozone debt crises, the pandemic & the 2022 inflation shock. While there were crises before that – the tech wreck, the Asian crisis, the early 1990s recession – they now seem more frequent & less related to traditional economic cycles.
9. Bigger government and more public debt – more defence spending and government involvement in economies, eg in onshoring, mean more public spending, bigger budget deficits and ever higher public debt – at a time when its already high. The latter is particularly evident in the US with Trump pushing for a $500bn (or 42%) defence budget boost when the US budget deficit is running around 6.5% of GDP despite low unemployment suggesting it should be in surplus.

It could also be evident in the upcoming Federal Budget in Australia, which is likely to see more “cost of living” help for households and business at the expense of commitments just a few months ago for the Budget to focus on savings in the level of spending and on productivity enhancing reforms. Another year of stronger spending growth will add to concerns that it will never be brought back to more sustainable levels, as in 2027 the focus will return to the next election.

Ever higher public debt and rising bond yields also run the risk of a public debt crisis at some point.

Implications for investors

There are three key implications for investors.

First, a somewhat less favourable economic outlook – if governments play an increasing role in the economies (via more defence spending, onshoring and protectionism), it’s likely to mean lower productivity resulting in slower economic growth and higher inflation. In short, lower living standards. In the US at present, it’s being fortuitously masked by the AI boom – but this could be a double-edged sword in the near term.

Second, the boost to geopolitical risk and reinforcement of populism and nationalism (notwithstanding the counter trend election outcome in Hungary) means increased uncertainty, including for businesses.

Finally, all of which runs the risk of more constrained and volatile investment returns. Which should mean that shares should be offering a higher risk premium over bonds. But at present the risk premium offered by US and Australian shares – as measured by the forward earnings yield less 10-year bond yields – remains very low.

By Dr Shane Oliver, Head of Investment Strategy and Chief Economist

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