The global economy is forecast to slow marginally this year, although it is still expected to expand at close to its long-term trend rate. In its latest report (April), the International Monetary Fund (IMF) is forecasting global growth to be 3.1% this year and 3.2% in 2027. In the IMF’s words, ‘headwinds from higher trade barriers and elevated uncertainty have been offset by tailwinds from technology-related investment; accommodative financial conditions and fiscal and monetary policy support’. It adds that ‘it may very well be that current tailwinds, including those from continued fiscal policy support, will last long enough to carry the global economy through the disruptions from the (Iran) war and to a higher growth path paved by productivity gains from artificial intelligence (AI)’. Growth in the advanced economies is forecast to be 1.8% this year and 1.7% in 2026 but with risks still ‘tilted to the downside’.

In the case of the US, the economy grew by a modest 2.0% at an annualised rate in the March quarter, with the IMF forecasting growth of 2.3% for the whole of 2026 and 2.1% for 2027, although the US administration is aiming for a higher rate of growth than this, with fiscal stimulus, reduced regulation and incentives for investment aimed at lifting economic activity over time. Despite inflation rising to its highest level in two years (3.3% in March), mainly reflecting higher energy prices due to the Iran war, the US central bank held interest rates steady at its 29 April meeting. Growth for the euro zone is forecast to remain weak (1.1% this year and 1.2% in 2027), while Japan is forecast to grow by only 0.7% this year and 0.6% next year.

The Australian economy grew by 0.8% in the December quarter and by 2.6% over the year. On a per capita basis, growth was 0.4% over the quarter and 0.9% over the year, this being only the fourth quarter of per capita growth over the past 14 quarters. Growth could slip lower over coming months due to the Reserve Bank (RBA) raising interest rates in response to indications that the annual inflation rate was once again rising (a headline rate of 4.6% and a ‘trimmed mean’ rate of 3.3% in March). The RBA raised its ‘cash rate’ in February and in March (to 4.1%), with more rate hikes likely soon despite weakness in the economy.

Most share markets were on a broadly upwards trend from April last year until the end of February this year, mostly due to declining interest rates in most of the major economies. However, with the outbreak of the Iran war, most markets went negative in March before beginning to rise again in April. This year, up to 30 April, overall market movements have included rises of 5% for the broad US market (S&P500), 7% for the technology-focused Nasdaq, 4% for the UK and 18% for Japan. European markets were mostly weaker (Germany and France each down 1%), while India fell 10% and the Australian market was flat.

Major sovereign bond markets have been volatile for some time, with yields (interest rates) rising and falling in line with the outlook for inflation. The US 10-year Treasury bond yield fell to a record low of 0.54% on 9 March 2020 during the pandemic but touched 5.0% in October 2023 before sliding down, then rising again. It was 4.37% on 30 April this year. Similarly, the Australian 10-year bond yield was 0.57% on 8 March 2020 but had risen to a high 5.06% by 30 April this year. Bond markets could see yields move even higher (and prices decline) over coming months if growth remains soft and inflation rises further due to high energy prices.

Fiducian’s diversified funds are currently above benchmark for international shares and around benchmark for domestic shares and listed property. Exposure to bond markets is close to benchmark, while cash holdings remain below benchmark.

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