The Australian bushfires will be a drag on economic growth, but RBA Governor Philip Lowe said the effects will be temporary.
Markets enjoyed a reprieve from the US-China trade war, although the issue is expected to remain live as we near the US presidential election in November.
Geopolitical tensions gave way to the outbreak of the coronavirus, resulting in travel restrictions and quarantine issues imposed by the Chinese authorities,
The worst appears to have passed for the eurozone, but weakness in the German economy has been exacerbated by the disruption to global trade.
The UK officially left the EU on 31 January and will enter a transition period until the end of 2020, during which the government will need to secure a trade deal.
The Australian economy grew at 1.7% in the September quarter and most likely less than 2.0% in the December quarter, well below the growth rate required to lift wages and inflation and to keep unemployment from rising. The RBA has indicated that if it drifts further away from achieving its inflation and unemployment targets, rates will be cut. The unemployment rate currently sits at 5.1% , up slightly from 5.0% a year ago.
Markets have been affected by risk events like the coronavirus and geopolitical unrest, which are creating uncertainty for investors and policymakers. Some indicators that were recently trending down, such as manufacturing activity, seem to have stabilised and consumer spending is still holding up. However, evidence suggests that we are in the later stages of the economic cycle.
The risk of a further escalation in the trade war has been averted for now, but a full
resolution remains unlikely until at least 2021. Removal of existing tariffs is conditional on achieving the targeted increase in US imports over 2020-21, meaning trade tensions are unlikely to disappear anytime soon.
The German statistics office reported that GDP grew by only 0.6% in 2019, down from 1.5% in 2018 and 2.5% in 2017. The government expects growth to pick up to 1.0% in 2020 having cut its forecast from 1.5% in October. The IHS Markit Eurozone PMI's show manufacturing weakness is most severe in Germany, but a pick up in the services sector points to flat overall activity at the end of 2019.
The outbreak of coronavirus in Wuhan and its spread to 27 other countries has resulted in travel restrictions and quarantine measures to prevent a pandemic. Australians flown home from Wuhan will be quarantined on Christmas Island for two weeks while Amercian's will be 'temporarily housed' at an air base in California. Containing the virus has been made more challenging given that the outbreak coincided with the Lunar New Year, which typically involves extensive worldwide travel by Chinese citizens.
The Asia region has been supported with accommodative monetary policy, with the central banks of South Korea and India both cutting interest rates in October 2019. However the Japanese economy continues to face significant headwinds, with industrial production slowing the most in a year and business confidence declining to a seven year low.
PMI's represent the 'purchasing managers index' which is used as an indication of business sentiment.
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