The impact of the COVID-19 pandemic on the global economy has been profound, especially in emerging, low-income economies with limited health care capacity
Harsher restrictions in Victoria following a spike in COVID-19 cases could cost the Australian economy $9 billion, according to the federal government
The Reserve Bank of Australia (RBA) kept rates on hold at 0.25% at its August meeting and indicated it will resume purchases of 3 year government bonds
Trade tensions between the US and China added to market volatility, while the outcome of the November US presidential election remains uncertain
A port explosion in Beirut killed at least 135 people and severe flooding in southern China added to the country's woes, displacing millions from their homes
Hopes of a V-shaped recovery faded as COVID-19 cases worldwide ticked over 15 million. Policy settings remain incredibly favourable as central banks and governments support economies via monetary easing and fiscal measures. Cyclical indicators such as unemployment figures and PMIs remain weak but are showing signs of improvement as the global economy adapts to the pandemic.
The Australian government warned that the economy likely shrunk at its fastest pace in recorded history in the June quarter, while the budget deficit will be the biggest since World War II as payments were extended to businesses and job seekers. The prime minister said the harsher lockdowns in Victoria would reduce GDP by between $7 billion and $9 billion in the September quarter, while the total hit to GDP is forecast to be around $12 billion.
At its August meeting the RBA left interest rates on hold and maintained its target for the 3-year yield curve at 0.25%. In his statement, Governor Lowe said the worst of the contraction has passed, but the outlook remains highly uncertain, especially given Victoria's move to stage four lockdowns. The recovery is expected to be gradual and highly contingent on how the pandemic evolves.
The June quarter CPI release reported a 1.9% fall in consumer prices (versus -2.0% expected), the largest recorded fall in the index's 72 year history. The quarterly fall was largely driven by plunging childcare (-95.0%), slumping automotive fuel prices (-19.3%) and a fall in pre-school and primary education (-16.2%). The federal government announced a $15.6 billion expansion of the JobKeeper program, of which $13 billion is estimated to flow to Victoria.
A note on Australian Equities: Australia's S&P/ASX200 index rose 0.5% in July with solid gains from the materials and information technology sectors.
However, the recovery was cut short in July amid reports of growing COVID-19 cases and anticipation of harsher restrictions in Victoria. Early in August, the Victorian government announced a state of disaster and moved to stage four lockdown, which will see an estimated 1 million people restricted from going to and from their workplace for at least six weeks, while only essential businesses including supermarkets and pharmacies may remain open.
The S&P/ASX200 index gained 0.5% over the month, dragged down by the energy and health care sectors. Materials performed well over the month, with strong returns from Fortescue Metals Group (+25.7%) and Oz Minerals (+24.4%). In early earnings reporting, Rio Tinto (+4.2%) announced that 1H 2020 EBIDTA fell 6% on the prior corresponding period due to lower commodity prices during the half, but reconfirmed its 2020 production guidance across all commodities.
Wesfarmers (+3.8%) gave a COVID-19 update following Victoria's lockdown announcement: all of the groups retail businesses will continue online operations through home delivery and contactless click and collect, while Bunnings will remain open for trade customers only and Officeworks will be open to service business customers. In FY20, Wesfarmers derived approximately 17% of retail sales from stores within metropolitan Melbourne.
The impact of COVID-19 caused US GDP to shrink by an annualised 32.9% in the June quarter (-9.5% quarter-on-quarter), slightly better than the expected 34.1% fall.
The flash estimate for eurozone June quarter GDP came in as expected, falling 12.1%, making it the largest contraction on record as lockdowns continued t impact global demand.
China's June quarter GDP came in above expectations, with the yearly rate increasing to 3.2% (2.5% expected), following a -6.8% reading in the previous quarter and becoming the first country to report growth since the beginning of the pandemic.
Japan was initially successful in preventing the spread of COVID-19. Cases have been rising recently, with over 40,000 confirmed at the start of August, but to date the economic effects have been less dramatic compared to other regions.
PMI's represent the 'purchasing managers index' which is used as an indication of business sentiment.
This update was written by Lonsec Research Pty Ltd and is current as at 12/08/2020. Information contained on this web page is of a general nature only and your personal financial position, objectives or needs have not been considered. Please ensure you have the necessary financial, tax and legal advice before acting on this information. Do not rely upon it when making financial decisions.