*Westpac Market Outlook June 2020
Our latest thinking on Australia, markets and the global economy.
Read full report ‘Westpac Market Outlook June 2020’ (PDF 561kb)
The COVID–19 pandemic that punched a hole in economic activity in the first half of 2020 continues to be brought under control in key jurisdictions, allowing for a relaxation in restrictions and setting the scene for a rebound. The market’s ‘risk on’ move has gathered more convincing momentum over the last month, propelled by positive news around the virus and abundant liquidity flowing from central banks. For some markets, such as equities, this has seen almost all of the COVID–19 losses reversed. For economies, the recovery path ahead still looks varied, and in most cases slow. There are also many risks. The potential for further virus outbreaks remains a concern. There are also risks around legacies from the recession that will present ongoing headwinds to growth, and issues that were already present prior to the crisis – such as US–China trade tensions, Brexit, the US election and, in Australia, sluggish growth in productivity and wages. That said, there are some positives in the mix as well: China’s recovery looks well entrenched and Europe is making promising moves towards a more unified fiscal response. On balance, we now see market moves as more likely to be sustained and have shifted key forecasts as a result – most notably for Australia, a more elevated profile for commodity prices and a material turn in the USD trend point to a higher AUD that may pose problems for policymakers down the track.
Australia: The Australian economy is now in recession for the first time since 1991, impacted by the global pandemic. The labour market fallout has been dramatic, with employment down 4.6% in April alone. The positive is the success in containing the spread of the virus, leading to some restrictions being eased earlier than anticipated. In light of that, we have upgraded our 2020 forecast, to –4% from –5%, with the rebound to emerge in the September quarter. For 2021 and beyond, the risk is that the recovery path is lacklustre. Growth will be constrained by a number of headwinds: ongoing fragilities, notably weak wages growth; and legacies, from the pandemic and the recession – with business investment spending likely to take some time to heal.
Coronavirus, a global snapshot: Trans–Tasman nations remain world leaders, and New Zealand has momentously eliminated COVID–19 from its shores. East Asia and Europe’s majors have shown no sign of a ‘second wave’ as they continue to reopen their economies, but the US is still struggling to stem the spread. Meanwhile, Brazil has emerged as a pandemic hotbed, highlighting the disparity between nations who have controlled the virus, and those who have not.
Commodities: The robust recovery of economic activity in China, the significant central bank liquidity operations with a related surge in equity markets, a weakening of the US dollar, and the re–opening of economies around the world have added up to a significant boon for commodity markets. As such we have revised our forecasts, the most significant change being to iron ore with the December 2020 price lifted to $90/t from US$65/t and the end 2021 price to US$87/t from US$67/t.
Global FX markets: A material turn in the US dollar story looks to be at hand. Having sustained a historically–high level in recent months as COVID–19 fears peaked, the US dollar (on a DXY basis) has since fallen away as risk appetite has returned. Euro looks set to be the prime beneficiary amongst the majors, with Sterling and Yen both still mired by economic dysfunction. Asian currencies, especially China’s Renminbi, will experience a strong gain in contrast, particularly as trade tensions abate in 2021.
New Zealand: With COVID–19 restrictions having been rolled back, activity is recovering in some parts of the economy. Notably, some indicators are signalling that thedownturn in activity might not be as severe as we or the New Zealand Government had feared. Even so, New Zealand is still in a deep recession, and further fiscal and monetary support will be required.
United States: Market sentiment is bullish on US recovery – a striking contrast to the underlying state of the economy. Despite a big surprise from employment in May, the US labour market has never been weaker. A string of strong gains is necessary to reverse the status quo, but this is highly unlikely on the data and circumstances to hand. While our growth forecasts have been revised up, this is more about the timing of re–opening than the economy’s sustainable growth capacity.
China: While most of the world has been struggling to contain the virus, China has shown it has not only completed its initial recovery by bringing production back to near normal levels, but is also now keenly focused on the next step: renewing the investment pipeline in pursuit of new growth opportunities and sustained economic development. The modest stimulus afforded at the 2020 NPC should be read as a vote of confidence in their economy, not that policy’s capacity is limited.
Europe: The economic consequences of COVID–19 are becoming clearer for Europe. While the labour market has shown resilience, thanks in large part because of Government support, GDP was hit hard in the March quarter even though the lockdowns only affected the very end of the quarter. The big positive for Europe is that not only is the ECB willing to do any and all that is necessary, but increasingly we are seeing fiscal authorities set aside their differences in pursuit of a robust, broad recovery.
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Andrew Hanlan, Senior Economist, , firstname.lastname@example.org
Bill Evans, Chief Economist, , email@example.com
Dominick Stephens, Chief Economist, NZ, , Dominick.Stephens@westpac.co.nz
Elliot Clarke, Senior Economist, , firstname.lastname@example.org
Justin Smirk, Senior Economist, , email@example.com
Matthew Hassan, Senior Economist , , firstname.lastname@example.org
Michael Gordon, Senior Economist, NZ, , Michael.Gordon@westpac.co.nz
Satish Ranchhod, Senior Economist, , Satish.Ranchhod@westpac.co.nz
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