RBA maintains steady course amid rough economic waters.
Amid a tumultuous couple of months in the Australian economy, RBA Governor Phillip Lowe has announced they have maintained the cash rate at the record breaking low of 25 basis points. This coincides with reports that consumer confidence under the Westpac Bank Consumer Sentiment Index has increased by 16.4% from April to May. Increased consumer confidence has mainly come from workers returning to work, the reopening of the hospitality and retail sector and the implementation of JobKeeper and JobSeeker. All of which have been crucial in making consumers feel like everything is back to normal.
Lowe notes that the “depth of the downturn will be less than initially expected”. Despite this, the whispers of a “second wave”, the Australian- China trade tensions and the emergence of violent riots in parts of America means that the ECONOMIC recovery from COVID-19 is still shrouded in volatility and apprehension.
However, in a sign of improving economic conditions, the RBA has not purchased any government bonds for almost a month. As Lowe states, this is due to the fact that “government bond markets are operating effectively”.
Australia’s world record comes to an end.
After 28 consecutive years of economic growth and no recessions, the combination of COVID-19, unprecedented summer bushfires and devastating floods was all too much for the Australian economy. Our GDP contracted by 0.3% for the March Quarter, with Treasurer Josh Frydenburg warning of “difficult days ahead” as the June Quarter results will account for the true impact of the lockdowns.
The components of GDP include net exports, government spending, household spending, inventories and dwelling and business consumption. Contributing to GDP, we have:
-NX: +0.5 percentage points
-Business Equipment -0.1pp
Despite this, the contraction was smaller than initially expected, as consensus was that it would be down 0.4 percentage points and so Frydenberg has presented the result as a success. However, the same trick might not work for the outcome of the June quarter.
Australian’s been buying low and selling high.
Over the past week, the ASX200 increased by 4.4% the biggest weekly growth figure over the COVID-19 period. Specifically, stocks like Zip and Qantas went up by 31% and 14% in one day. The overall ASX results are largely due to the flattening of the curve, which has allowed Australia to make a gradual return to the status quo. Wall Street has additionally experienced its greatest winning streak since the pandemic began, with the S & P 500 increasing by 5% last week and it is hoped that this is a precursor for Australian markets in the coming week. However, economists still warn that we should not be optimistic due to eerie similarities with recoveries in both the Great Depression and the Global Financial Crisis. The markets can only return to normalcy once the volatility has ended, which while the future looks a little more stable, it’s still a long way from resembling the world we took for granted.