Monthly economic update with MLC, May 2021

MLC Asset Management Senior Economist Bob Cunneen discusses factors behind gains in the global economy and the Australian market over May.

Why did global shares deliver a solid 1.3 per cent positive return for May?

Global share markets delivered a solid 1.3 per cent gain for May, continuing their strong rally since the start of the year. There were a few positive factors in play. Particularly notable was the strong vaccination rollout across the United States as well as Europe. So, if we looked at the United States, more than 80 per cent of the population has received one vaccine dose at least. In the case of Europe, it's more than 45 per cent. What is also noticeable is Wall Street has made new record highs, particularly on the back of very strong corporate profits in the United States. So, if we looked at corporate profits for the year to March, they're up more than 50 per cent. Also as a positive factor has been the low interest rate guidance from respective central banks around the world. So, if we look at the Federal Reserve, the American central bank, they're giving guidance that they're not prepared to raise interest rates until the next couple of years. The third factor in play has been a very strong global recovery story.

How is the global economy performing?

The global economy is performing well, but some countries are obviously doing much better than others, given the better performance in terms of virus containment as well as vaccine rollout. So, if we looked at China for the year to March, the Chinese economy, robust 18 per cent increase in GDP over the past year, and we're seeing continued strength in industrial production and retail sales. For the United States, their economy has also made a solid recovery. Their economy is now 0.4 per cent larger than what it was in March of 2020. So, we're seeing a very strong rebound in retail spending as well as employment over the past nine months. In the case of Europe, the performance has been mixed. Europe has struggled with the virus, and their economies have been in recession. However, there are some promising signs that the lockdowns are going to come to an end with the very positive vaccine rollout.

Why did Australian shares deliver a 2.3 per cent gain in May?

Australian shares delivered a strong 2.3 per cent gain for May, and this was largely on the back of a few positive sectors. In particular, the bank shares were favoured, with a gain of nearly 6 per cent in May, because of signs that debt impairment costs were falling, and there were very positive signs for credit growth going forward. In the case of consumer discretionary, that was up more than 3.5 per cent in May, and that's largely on the back of the positive consumer spending story. In the case of the resources sector, that made a gain of around 1.3 per cent, and that was on the back of the strong commodity price rises for copper, iron ore and gold.

How is the Australian economy travelling?

The Australian economy is recording very strong economic activity presently, and we can see that in terms of the GDP number that came out for the March quarter, where the economy expanded by approximately 2 per cent, and 1 per cent for the past year. Now, in terms of the business and consumer surveys, they continue to be strong, which indicates that that recovery story will continue. However, we need to be mindful that we've had a virus outbreak in Melbourne, and this is a major concern because it has required an extended lockdown at this stage. So, it's a reminder that the virus is still a threat until all Australians are vaccinated.

Source: Finance News Network