Economic update – May 2023

By Infocus Author

In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points:
– Peak inflation now appears to be behind us
– US economic growth showing some resilience but is weakening
– Inflation is declining as higher interest rates start to bite on household spending
– Interest rates in Australia look close to peaking this cycle but appear to be data dependent

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact the team.

The Big Picture

There are signs that the US economy is softening but, following the anticipated 0.25% rate increase early this month, will this be enough to cause the US Federal Reserve (Fed) to now pause its interest rate hiking cycle? At the time of writing, the market-based probability of a pause at the Fed’s June 14 meeting is 100%, notwithstanding, expectations of Central Bank interest rate movements are more volatile in the current environment of elevated uncertainty. Again, and at time of writing, markets are forecasting that the Fed will have cut interest rates at least once by the end of the year which is at odds with the Fed’s view that they won’t. This divergence of views, in part, makes it somewhat easier to reconcile the market reaction to the Fed’s decision to raise interest rates this month when confronted with a softening economy and knowledge of a potential recession. We note the European Central Bank (ECB) followed the Fed and increased their cash rate by 0.25%.

It can take quite a while – many say about 12 to 18 months – for interest rates to work their way through to the ‘real economy’ (like jobs and growth). Nobody has a good handle on what impact the interest rate hikes of the past year have already done to the economy. In the US, the market expected a modest 2% GDP growth (annualised) for the March quarter of 2023 and it came in at about half of that at 1.1%. The latest monthly US retail sales fell by -0.9% against an expected -0.5% for the month. The annual figure was -3.1%. Usually, when a recession hits, it generally occurs quite quickly.

Many economists expect a US recession to start this year. Any recession might be expected to get worse the more interest rates are hiked – or held at too high a level for too long.

A recession need not have a negative impact on the share market going forward. The US March quarter reporting season has already produced a few stellar results among the large tech companies. Of those companies that have reported so far (approximately 50%), 80% have delivered better than expected earnings for March quarter after earnings expectations had previously been marked down. We think a mild recession has been priced in and this seems reasonable unless the Fed blindly institutes further interest rate rises beyond what is already factored in for May.

Annual US inflation rates are still high owing to the double-digit supply (input price) induced inflation of nearly a year ago. Recent monthly data are now more promising. The Fed’s preferred inflation measures, the Consumer Price Index (CPI) and Private Consumption Expenditure (PCE) indices both came in at only 0.1% for the month of March.

The economic picture here is quite different from that in the US. The month of April ended with an estimated 100% chance of the Reserve Bank of Australia (RBA) being ‘on hold’ in May. The markets were taken by surprise on Tuesday 2nd of May when the RBA increased the cash rate by 0.25% to 3.85% citing concerns of residual strength in inflation as the reason. The RBA press release announced this change also opens the way for further rate increases should the RBA deem them as necessary to contain inflation and return it to the target band of 2% to 3% by mid-2025. Ahead of the rate increase a number of banks had already started cutting some of their mortgage rates!

Our labour force data published in April was particularly strong. The unemployment rate was steady at near a multi-decade low of 3.5%, 72,000 new full-time jobs were created and 19,000 part time jobs were lost. Retail sales were soft, up 0.2% for the month but 6.4% for the year, indicating a slowing in trend growth.

Australian inflation is still a little elevated at 1.4% for the March quarter but the RBA’s preferred variant came in at 1.2%. The annual rate was 7% which is down from the 7.8% recorded in the December quarter of 2022.

A review of the RBA by an independent panel was completed. They recommend a specialist committee be formed to consider interest rate changes and for it to meet only 8 times per year rather the current 11. The changes could actually improve monetary policy implementation and decision making.

The best economic news of the month came in the publishing of China’s economic growth data which came in at 4.5% p.a. when only 4.0% p.a. had been expected. The December 2022 quarter was 2.9% p.a. and the official forecast for 2023 is 5.0% p.a. China’s inflation is also well contained. We see the resurgence of the Chinese economy after the pandemic lockdowns as being a big positive factor in Australia being able to avoid a recession.

The European economy continues to languish with the latest estimate for March quarter growth at 0.1%, narrowly avoiding a technical recession marked by two successive quarters of negative growth. EU inflation was the lowest in a year at 6.9% but the UK is still struggling with inflation at 10.1%.

The ‘banking crisis’ that started in the US regional banks over a month ago does not appear to be spreading materially although there have been a couple of subsequent failures noting that depositors’ funds were protected. We do not think this is the beginning of a systemic issue in the banking system but do note that it is a clear indication that stress and vulnerabilities exist which could lead to isolated issues with other regional banks.

Sadly, the situation in the Ukraine does not seem to be improving. However, the economic consequences for the global economy anticipated at the outbreak of the conflict have not occurred to the extent expected. Food prices are still elevated but their rate of change has settled down and some falls have been recorded. Shipping costs of containers and the like are down over 82% from the pandemic peak and the Covid lockdown in China is largely behind us.

As our base case, we see modest capital gains in the US (S&P 500) and in Australia (ASX 200) to the end of the year and government bond markets have settled down. The worst of inflation is most likely behind us and the annual calculation of inflation rates will soon improve markedly as the previous higher monthly data points fall out of the calculation window.

Asset Classes

Australian Equities 

The ASX 200 bounced back +1.8% in April after a -1.1% decline in March. All industry sectors, except Materials, were firmly in positive territory. The index is up +3.8% for the year to date and +11.3% since July 1 of 2022 (financial year to date).

International Equities 

US equities (S&P 500) rose 1.5% in April and other major developed world indexes were up similarly.  In contrast, Emerging Markets were down  0.9%.

For the year-to-date there are some impressive performances from foreign equities: S&P 500 +8.6%; London FTSE +5.6%; German DAX +14.4%; Japan Nikkei +10.6%; Shanghai Composite +7.6%; Emerging Markets +2.4%; and the World +9.0%.

Bonds and Interest Rates

The US Fed is thought to be on pause now after the 0.25% interest rate increase early in May. However, the ‘CME Fedwatch tool’ which uses current data from the bond market to arrive at an estimate for the US cash interest rate, is reporting a forecast that the most likely interest rate is 4.25% at year-end (48% chance). We caution that these forecasts are very fluid and have fluctuated significantly recently. Our expectation is that this will continue and the Fed responds to subsequent economic data. This current market view is divergent from the view of the US Federal Reserve Board member median view, which forecasts a rate of 5.1% for the cash rate at year end.

Closer to home, following the RBA’s surprise interest rate increase in May, the prospect of further increases is low and will be data dependent. More broadly our expectation is that the RBA will likely pause again in June.

Other Assets 

The price of iron ore was well down over April (-16.9%) but the price is still above $100 per tonne. The prices of oil and gold were largely flat and copper also was down -4.7%.

The Australian dollar fell by -1.5% against the US dollar in April.

The VIX volatility index (a measure of US share market volatility) is now back to almost the ‘normal’ levels at 15.8. Investors seem to be getting more comfortable with the direction of the share markets and appear to be of the view that inflation is heading down and interest rates rises are at or nearing an end.

Regional Review


Our unemployment rate stayed at a very low 3.5% and net 53,000 new jobs were created (+72,200 full-time and  19,200 part-time) made up the total jobs figure. This composition of the job’s growth data (more full time than part time) is positive for economic growth and shows continuing strong demand for labour.

Retail sales were a bit soft at +0.2% for the month or 6.4% on the year.

The 1.4% quarterly CPI inflation figure was buoyed by a +5.3% education component.

The Federal Budget will be handed down on May 9th. It is widely expected that the government will make some improvements to healthcare.


As the impact of China’s pandemic lockdown subsides, economic growth is bouncing back. March quarter growth came in at 4.5% (annualised) which is not far short of the 5% targeted by the government for 2023.

China CPI came in at  -0.3% for the month and 0.7% for the year. The market expected 1.0% for the annual figure. The producer price index (PPI) came in on expectations at -2.5% for the year.


The US recorded 236,000 new jobs which was only just below the 238,000 expected. However, news of big job cuts, particularly in big tech companies is concerning. The unemployment rate was still quite strong at 3.5% and slightly better than expected.

Wage growth at 4.4% p.a. was the lowest for the past year.  CPI headline inflation was 0.1% for the month or 5.0% for the year. The core CPI data were 0.4% for the month and 5.6% for the year as the energy and food prices that are stripped from the headline rate made negative contributions.

The Personal Consumption Expenditure (PCE) measure of inflation, which is preferred by the Fed, was 0.1% for the month and 4.2% for the year in the headline form and 0.3% for the month and 4.6% for the year in their ‘core’ state. The peak PCE rate was 7.0% in June 2021 and that was the highest since 1981.
There was some weakness in economic growth at only 1.1% for March quarter (annualised) against an expected 2.0%. Retail sales were a big disappointment at -0.9% against an expected -0.5% with the annual change now being -3.1%.

As the delayed impact of past interest rates hikes works its way through the economy, we expect growth and sales to remain soft. Jobs maybe resilient for somewhat longer.


EU growth was negative in the December quarter of 2022 but backed that up with +0.1% in March quarter of 2023 thus avoiding a technical recession – for now!
Inflation for the region was 6.9% but 10.1% for the UK where 9.8% had been expected, the previous reading was 10.4%.

Rest of the World 

Japan’s core rate of inflation was unchanged at 3.1%. The last time Japanese inflation was higher was 41 years ago.

OPEC+ (+ includes Russia) cut supply by 1.2 million barrels per day and this had an immediate impact on oil prices – which rose 6% to 7% for that day.

The International Monetary Fund (IMF) shaved 0.2% points from its January global growth forecast for 2023 of 3.0% to 2.8%. The 2024 forecast is currently 3.0%