How does the Stock Market Impact the Australian Economy?

For example, do you recall the country having started a new year with interest rates so low and uncertainties at levels that they currently are? No, you would not have! To top it all off, the monster bushfires have regenerated, the unprecedentedly catastrophic disaster claiming human lives, devasting flora and fauna and destroying physical structures.

Australia’s Economy in 2019

The developed market economy of Australia recorded its 28th year of successive annual economic growth in 2019. This sets a new record of steady growth among developed economies for uninterrupted expansion. Australia is likely to realise an annual real GDP growth (average) of 2.7% between 2019 and 2023, which would be the highest among major advanced economies. Interestingly, the country has been the only key developed one to have logged no annual recessions from 1992 till 2018.

But 2019 was full of surprises. It began with the unexpected return of the conservative coalition government post the May federal election, after which the Central Bank began shunning interest rates to record lows, reflecting the weaker (than expected) performance of Australia’s economy.

However, change is the only constant and micro and macro-economic factors engulf developed and developing nations alike. Over 2019, Australian GDP growth was weaker than previously anticipated at the back of soft consumption and dwelling investment, a housing downturn, high unemployment rate, a severe drought and global adverse impacts of the US-China trade war.

Below are key economic indicators as on 10 January 2020-

• Economic growth was 1.7%
• Inflation was 1.7%
• Unemployment rate was 5.3%, employment growth and wages growth being 2% and 2.2%, respectively
• Average weekly earnings is $1,238 and the household saving ratio was 4.8%
• Net foreign liabilities is 49.4% of GDP.
• One Australian dollar equal to USD 0.68
• Cash rate as low as 0.75%

Australian Economy Outlook 2020

Towards the end of 2019, some risks on the Australian economy lessened, though few were tilted to the downside. Unemployment rates were fairly low and wages growth marginally inched up (although inflation remained low). The US–China trade and technology disagreement continued to blow away investment and international trade flows as businesses were wary about spending plans driven by the uncertainty.

However, 2020 started on some positive note with improvement in job vacancies, housing marker revival and robust trade surplus.

In 2020:

• GDP growth is expected to be around 2¾% over 2019 and 2020.
• Underlying inflation is likely to pick up to 2% by early 2020, and further lift by mid-2021.
• The growth in Australia's major trading partners is likely to be approximately 3¾% in 2019 and 2020.
• Mean inflation is likely to grow to 2% by early 2020 and be a little above 2% by early 2021.

However, catalysed by monetary and fiscal stimuli, which is likely to boost household income and consumer spending, 2020 is expected to be a comparatively better year for the Australian economy, though growth will remain relatively subdued compared to the historically high rates of economic growth.

How does the Stock Market Affect the Australian Economy?

Australia’s equities market is a huge part of the Australian economy, and its influence from the rest of the world is huge. The Australian Securities Exchange (ASX) is very much domestic but is also a diverse market shaped by a wider global market, driven by the fears and victories of events across oceans.

Interestingly, a lot of Australian shares are owned beyond Australia. This is why investors sitting in foreign lands are influenced by economic data and company announcements both in and outside Australia besides, keeping a close watch on global economic indicators.

For example, good news from world’s biggest economies, USA and China, is good news for the markets in Australia (and vice-versa!). These tend to have extensive impacts in Australia.

Moving on to the relationship that the Australian economy and its stock market share, the stock market does not necessarily reflect the economic conditions of an economy. However, it does reflect the consensus expectations for companies by market participants in the future.

Some experts believe that if an economy is growing, then output will be increasing, and companies will have better chances to be experiencing increased profitability. Consequently, this higher profit makes the booming company’s shares more attractive which leads to bigger dividends to shareholders. However, a lot of factors can challenge this thought process- macro-economic indicators, disrupted trade relations etc.

The below graph depicts the trend that the benchmark S&P ASX 200 and Australia’s GDP (across 2014-2018) followed:

Source: Reuters, World Bank, Kalkine

This shows that the stock market returns does not necessarily track the GDP returns.

In 2015, the energy crisis (crude oil price crash) failed to meet the investors’ expectation, dragging the S&P ASX 200 in the negative territory.

In 2018, the beginning of a housing downturn and fears of a nearing recession kept investors at bay from investing in the Australian stocks. It was also partially driven by the Royal Commission’s hearings that led to the banks ending the year with a stalled reputation and the heating of the trade war, which continues to be a worry for economies alike.

Stock Market Catalysts that Improve Economy

Even though the stock market and an economy does not necessarily move alike, the consensus states that a country with a consistently higher rate of economic growth witnesses its stock markets performing relatively better.

Let us look at a few fundamental factors pertaining to the stock market that help boost and economy-

• Business Expansion and Wealth Creation- If a business expands, there is flow of money and a probable rise of employment, which boosts the economy and creates wealth in the country. Moreover, investors are keen to tap these companies (if listed on an exchange) as expansion is an indicator of good health and profitability.
• Bond Market/Pensions- Retirement planning is best sought in the share market with a hoard of options, especially bonds and pensions. Moreover, bonds impact the economy by offering extra spending money for both consumers and the government.
• Impact on Confidence- Investor confidence in a stock market definitely depicts that the economy is doing well, hence attracting more investors. The stock market can be looked upon as a vote of confidence.

It is safe to believe that even though the stock market is not the real economy, it can have a deep economic impact on individual consumers and overall economy. Even though the relationship between a stock market and the economy is subjective, both are indicators of how well or bad an economy is performing.

Disclaimer

This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice.