Key insights from the week that was.
This week has been a quiet one for data. And in its absence, market participants have instead focused on the potential flattening of the COVID-19 infection curve in both Europe and the US. Asset prices have rallied as a result.
Despite the positive sentiment shown by markets, policy makers remain very cautious over the outlook. At their April meeting, the RBA affirmed its commitment to their recently announced policies as well as an expectation that these measures will prove effective. To our mind, the RBA’s actions compliment announced fiscal stimulus well (the now-legislated JobKeeper program in particular) and set our economy up for a robust recovery once the COVID-19 threat has dissipated. A full discussion of the RBA’s response to COVID-19 is offered by Chief Economist Bill Evans is this week’s economic video update. Also note that the RBA has just released their April Financial Stability Review, providing their own detailed perspective on recent developments as well as the consequences for Australia’s economy and financial system.
The other major releases to highlight this week are our own, particularly April Market Outlook. Herein we provide our take on recent local and global developments, and how they are informing our expectations for the period ahead. For Australia, there is a summary of the changes made to policy this past month and the implications for the Australian dollar and term interest rates. A detailed look ahead for Australia’s economy and commodity markets is also offered. For those interested in how the economic outlook breaks down across the states, our April Coast-to-Coast is also now available.
On the international front, as is typically the case, the US, Europe and China are front of mind this month. Between the US and Europe, there is increasingly little difference in the economic outcomes we expect. A month ago, COVID-19 was only anticipated to result in a modest recession in the US; but now, with almost 30% of known cases globally, the US looks as though it is facing into its worst economic crisis since the great depression. By April’s end, the unemployment rate there is likely to be around 12%, on its way to an eventual peak between 15% and 20%. The consequence for economic activity is a year-average decline of around 6.0% in 2020 followed by a modest 1.0% rebound in 2021. Europe is still likely to experience a sharper contraction of around 8.5% in 2020; however, this is because of the tighter restrictions in place on the Continent rather than the consequent deterioration in the labour market, consumption and investment. Of the countries in these regions, Germany and the UK look likely to experience the strongest rebound into 2021. In contrast, the US could find it difficult to wipe out the threat from COVID-19 unless further significant steps are taken by the Government.
China, in stark contrast, is beginning its rebound now that domestic restrictions on travel and trade have been lifted. Even Wuhan, the epicentre of the crisis, is now free of its lockdown. Apparent in anecdotes and the first partials available for March is that China’s economy is back near full capacity. Ahead, central authorities will work with local governments, the financial system and the private sector to accelerate investment and employment and, in so doing, set the nation up for a robust period of growth. The offset in the short term for this domestic strength is external demand. The US and Europe are obviously weak, but so is the rest of Asia, limiting export opportunities for China. Because of this deterioration in external demand, we now expect Chinese growth of just 2.5% in 2020, followed by a 7.3% rise in 2021. Likely outcomes for FX markets as a result of these developments can also be found in this month’s Market Outlook.
