Jun 19

Economic Outlook

The world began 2020 much as it ended in 2019. There was growing optimism in the global economy with expectations that the US and China had ‘buried the hatchet’ on trade disputes and the United Kingdom (UK) would be exiting the European Union (EU) in a less disruptive fashion. This optimism lasted until February.

The global economy

During February a growing virus outbreak in China known as the Coronavirus or Covid-19 started to feature as a major concern. As of mid-May, there have been over 4.3 million confirmed cases and over 300,000 deaths globally.

Governments all over the world were compelled to impose lockdown measures that shut down businesses and restricted citizens’ freedom of movement. International travel has almost entirely shutdown as countries have closed their borders. The economic damage caused by these measures has been stark, with millions of United States (US) workers filing for unemployment. Economists now expect a global recession to be caused by this shock. An economic recovery is expected towards the end of 2020. Substantial government spending and monetary policy, for example, interest rate cuts, will help with the economic recovery but it will take time for businesses to restart and jobs to return.

A second shock to the economy has been an oil price war that started in early March. Saudi Arabia sparked this price war by increasing production and discounting prices in a bid to punish Russia and other marginal producers. This was their chosen response when talks between global oil cartel, The Organisation of the Petroleum Exporting Countries (OPEC) and other producers failed after Russia refused to impose additional production cuts to increase oil prices. This, in addition to weak demand due to the global Coronavirus shutdowns, has caused oil prices to crash substantially. This is good for consumers due to cheaper petrol prices. However, for oil producing countries and regions in the US, this is expected to compound the economic damage the Coronavirus shutdowns were already inflicting.

Australia

Australia was not immune to the Coronavirus outbreak. The shutdown efforts appear to have been successful in limiting the human cost. As of late May, there have been a total of 102 deaths with only 948 active cases and over 5,700 people who have recovered. However, the economic cost has been substantial with expectations that the unemployment rate will rise to over 10%. Australia is expected to mark its first recession since the early 1990s over the June 1990 and September 1990 quarters.

This quarter saw the Reserve Bank of Australia (RBA) cut interest rates to a record low of 0.25% and actively buy Government bonds to keep long-term borrowing costs low. The Federal Government also intervened with substantial increases to unemployment benefits, for example the JobSeeker Payment, as well as a wage subsidy program called JobKeeper which aims to help keep businesses connected to their employees through this economic downturn. It is expected that lockdown measures will be gradually lifted during the June 2020 quarter following recent announcements by the Prime Minister. The economic recovery is expected to take some time, particularly as authorities want to limit any chance of a new wave of infections.

Shares

During the March quarter, the Australian share market fell (-23.1%). At a sector level, health care (+1.5%) and consumer staples (-4.3%) were the strongest relative performers but could not offset the negative performance in energy (-48.9%) or the financials (-28.7%) and property sectors (-34.8%).

The energy sector fall was due to two factors. First, the global shutdowns to control Coronavirus cases and second, the oil price war during March. These saw oil prices fall 65.6% during the quarter and had a similar impact on the share prices of companies with energy exposure.

Weakness in the property sector was triggered by the pressure of the shutdown on both retail and commercial tenants with landlords compelled to offer rental relief, which is hurting the earnings of the sector substantially in the short-term.

Fixed income and currencies

Bond prices rose, driving bond yields lower both here and overseas. In Australia, the RBA cut interest rates to a record low of 0.25% by 31 March 2020 and signalled its intervention in the bond market to keep the three-year bond yield at 0.25%. These measures supported bond returns as did rate cuts overseas. However, riskier bonds, such as business debt, lost value as investors were concerned about rising bankruptcies due to the economic impact of the Coronavirus. This saw negative returns for corporate bond investments.

The Australian dollar acted as a buffer for overseas investors, falling 12.7% during the quarter. Investors sold Australiandollars because they expect global economic weakness to reduced demand for commodities. This fall in the Australian dollar helps investors with unhedged overseas investments but raises the cost of imported goods.

Talking to a financial planning professional can help to ensure you’re following a strategy to achieve your financial goals.  Speak with LT to see how we can help, call (02) 4926 2300.

 

Source: IOOF

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