What's the economic situation right now?
Investments
Since October 2022, investment markets have picked up, reaching a peak in early February 2023, making up for much of the loss in 2022. But the volatile days may not be over.
In mid-March, Silicon Valley Bank collapsed in the US, raising panic among customers of a potential cash crisis. Fears of contagion across the banking system spread, with New York-based Signature Bank also collapsing. That situation calmed when the US government stepped in to guarantee depositors of those banks.
These events in the US were quickly followed by some unravelling in Europe. There, global bank Credit Suisse admitted financial reporting weaknesses, which severely undermined confidence in the bank, sending its share price plummeting. As it is based in Switzerland, the government there arranged for the nation’s biggest bank, UBS Group, to buy Credit Suisse, to avoid further panic. About a week later concerns mounted over Deutsche Bank, Germany’s largest bank, with its share price dropping almost 10% before rebounding.
It is uncertain if these banking crises could continue. But already, they have extended the recent broader sharemarket decline, which began in early February.
Inflation
The even more critical issue for Australian and global economies right now is inflation and the rise in rates to combat it. This is the greatest issue affecting the prices of goods and services, the value of property, and returns on your investments.
In Australia the cash rate is now set at 3.6% – a steep rise from 0.1% last year. In the world’s biggest economy, the United States, a similar rise means the federal funds rate is now at 4.75% to 5% – that’s up more than 3% since June 2022. As banks increase their interest rates in turn, it’s consumers that are feeling the pinch.
While it appears inflation has peaked in Australia (now down to 6.8% for the 12 months to February), that may not be the case globally.