2022 Year in Review
Inflation dominated the economic landscape
The year began optimistically, as we finally began to emerge from Covid restrictions. Russia threw a curve ball that reverberated around the world and suddenly people who hadn’t given a thought to the Reserve Bank were eagerly waiting for its monthly interest rate announcements.
2022 was the year of rising interest rates, surging inflation, war in Ukraine and recession fears. These factors created cost-of-living pressures for households and a downturn in share and bond markets.
Super funds suffered their first calendar year loss since 2011. Ratings group Chant West estimates the median growth fund fell about 4 per cent last year.i
The big picture
Even though investors have come to expect unpredictable markets, nobody could have predicted what unfolded in 2022.
Russia’s invasion of Ukraine in February led to a global economy and investment markets shake up. It disrupted energy and food supplies, pushing up prices and inflation.
Inflation sits around 7 per cent in Australia and the US, with the Euro area around 11 per cent.ii
As a result, central banks began aggressively lifting interest rates.
Rising inflation and interest rates
The Reserve Bank of Australia (RBA) lifted the cash rate from 0.1 per cent in May to 3.1 per cent in December,iii quickly flowing through to mortgage interest rates.
Australia remains in a better position than most, with unemployment below 3.5 per cent and wages growth of 3.1 per cent running well behind inflation.iv
Australia’s economic growth increased to 5.9% in the September quarterv before contracting to an estimated 3 per cent by year’s end.vi
Volatile share markets
Investors endured a nail-biting year.
Global shares plunged in October only to snap back late in the year on hopes that interest rates may be near their peak. The US market finished 19 per cent lower, due to exposure to high-tech stocks and the Federal Reserve’s aggressive interest rate hikes. Chinese shares were down 15 per cent as strict Covid lockdowns shut down much of its economy.
Australian shares performed well by comparison, down just 7 per cent.
Energy and utilities stocks were strong due to the impact of the war in Ukraine on oil and gas prices. The worst performers were information technology, real estate and consumer discretionary stocks due to cost-of-living pressures.
Property slowdown
After peaking in May, national home values fell sharply as the Reserve Bank began increasing interest rates. The CoreLogic home value index fell 5.3% in 2022, the first calendar year decline since the global financial crisis of 2008.
Sydney (-12 per cent), and Melbourne (-8 per cent) led the downturn. Bucking the trend, prices edged higher in Adelaide (up 10 per cent), Perth (3.6 per cent), Darwin (4.3 per cent).
Rental returns outpaced home prices, as interest rates, demographic shifts and low vacancy rates pushed rents up 10.2 per cent in 2022. Gross yields recovered to pre-Covid levels, rising to 3.78 per cent in December due to strong rental growth and falling housing values.
Despite the downturn, CoreLogic reports housing values generally remain above pre-COVID levels. At year end, capital cities combined were still 11.7 per cent above March 2020 levels, while regional markets were 32.2 per cent higher.
Looking ahead
While the outlook for 2023 remains challenging, there are signs that central banks are nearing the end of their rate hikes.
Issues for investors to watch out for in the year ahead are:
A protracted conflict in Ukraine
A new COVID wave in China disrupting supply chains further, and
Steeper than expected falls in Australian housing prices which could lead to forced sales and dampen consumer spending.
If you would like to discuss your investment strategy in the light of prevailing economic conditions, please get in touch.
Note: all share market figures are live prices as at 31 December 2022 sourced from:https://tradingeconomics.com/stocks.
All property figures are sourced from:https://www.corelogic.com.au/news-research/news/2022/corelogic-home-value-index-australian-housing-values-down-5.3-over-2022
ihttps://www.chantwest.com.au/resources/another-strong-month-for-super-funds-as-recovery-continues/
iihttps://tradingeconomics.com/country-list/inflation-rate
iiihttps://www.rba.gov.au/statistics/cash-rate/
ivhttps://www.rba.gov.au/snapshots/economy-indicators-snapshot/
vhttps://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release
vihttps://www.rba.gov.au/publications/smp/2022/nov/economic-outlook.html