Mar 31, 2020Insights

Economic update March 2020

Market and Economic overview


  • Headline inflation rose slightly more than expected in the December quarter. Prices rose 0.7% over the three-month period, the fastest quarterly increase in three years. This took the annual inflation rate to 1.8%.
  • The increase was partly due to higher food prices, affected by disruptions to transportation owing to bush fires in November and December. Fruit prices rose nearly 7%, for example.
  • Employment data for December was again strong, following a better-than-expected result in November.
  • A further 28,900 new jobs were added, almost three times the 10,000 estimate. This lowered the unemployment rate to 5.1%.
  • New jobs were again dominated by part-time positions, but the improvement was nonetheless quite pleasing for policymakers.
  • Together, the stronger inflation and labour market data prompted the Reserve Bank of Australia to leave interest rates unchanged at 0.75% at its meeting in early February.


United States

  • The pace of GDP growth in the US was unchanged in the December quarter. The world’s largest economy expanded at an annual pace of 2.1%; the same as in the third quarter of 2019.
  • There was a slowdown in consumer spending, however, which may be cause for concern given services sectors account for around three quarters of the overall economy.
  • Policymakers will be hoping to see a rebound in discretionary spending in early 2020. It appears that Americans can afford it – wage growth continues to outpace inflation, meaning consumers have greater purchasing power.
  • More than two million new jobs were also created in 2019, which took the unemployment rate to a 50-year low of just 3.5%.
  • Interest rates were unchanged, with the target Federal Funds rate remaining between 1.5% and 1.75%.



  • The UK’s withdrawal from the European Union occurred as planned, finalising the Brexit process that had been three and a half years in the making.
  • UK policy makers can now focus on the domestic economy, which remains subdued.
  • Consumer confidence has improved slightly following the recent general election, but remains fragile.
  • Despite speculation regarding a possible cut, UK interest rates were left unchanged at 0.75% at Bank of England Governor Carney’s last meeting.
  • At the same time, officials lowered their GDP growth forecast for 2020, to 0.75% from 1.25% previously.
  • Meanwhile, German inflation continued to pick up, indicating that activity levels in the Eurozone’s largest economy may be improving.


New Zealand

  • Inflation also picked up in New Zealand. Consumer prices rose at an annual pace of 1.9% in the fourth quarter of 2019, compared with 1.5% in the prior three-month period and ahead of consensus forecasts.
  • According to a Reserve Bank spokesperson, the weaker NZ dollar is helping to moderate the impact of global headwinds.
  • The kiwi economy should also be supported by a NZ$12 billion infrastructure spending program. More than half of the expenditure is being brought forward, with various road and rail works set to commence later this year.



  • Coronavirus-related news dominated attention in Asia. Several airlines have suspended services to and from mainland China. This could affect tourism-related sectors worldwide, as Chinese tourists are estimated to account for around 30% of holiday spending globally. Around 1.5 million Chinese people visit Australia annually, for example.
  • Official GDP data showed the Chinese economy grew at an annual pace of 6.0% in the December quarter, the same as in the September quarter. Growth is being supported by buoyant consumer spending domestically.
"The Australian dollar depreciated quite sharply in January, recording its worst monthly performance for more than two years."

Australian dollar

The Australian dollar depreciated quite sharply in January, recording its worst monthly performance for more than two years.

The currency lost nearly 5% against the US dollar, battered by coronavirus-related concerns. Australia’s close ties with China means ‘risk off’ sentiment around the virus is affecting the Australian dollar more than most other currencies.

A weaker currency may prove beneficial for Australian manufacturers, as it makes locally produced goods more competitively priced internationally.



Optimism following the agreement of a ‘phase one’ trade deal between the US and China quickly gave way to demand and economic growth concerns stemming from the rapid spread of the coronavirus.

Oil (Brent -13.3%) felt the uncertainty sharply, while industrial metals were also lower; copper (-9.5%), nickel (-8.4%) and aluminium (-4.8%) all posted sizeable losses by end January. Iron ore (-10.1%) also fell on China-related demand concerns.

Unsurprisingly, gold (+4.7%) posted solid gains on ‘safe haven’ demand amid the uncertainty.

Australian equities

The S&P/ASX 100 Accumulation Index delivered an impressive +5.1% return for the month of  January, its best return in 26 years. This helped the Index set new all-time highs in terms of price and total return.

All Information Technology constituents helped push the sector +12.8% higher. Given their bond-proxy nature, the Utilities sector lagged the market and provided a modest +0.6% return.

Although Australia’s small companies underperformed their large cap peers, the S&P/ASX Small Ordinaries Accumulation Index still delivered a solid +3.4% return.

Listed property

Global listed property kicked off the calendar year with solid gains in January. The FTSE EPRA/NAREIT Developed Index returned 2.2% in local currency terms and a more impressive 5.9% in AUD terms, reflecting the weaker Australian dollar. 

The Australian property sector led the charge as A-REITs returned 6.4% during the month. Hong Kong (-7.8%) was by far the worst performing market. Sentiment towards equities in the region plunged, as concerns around the coronavirus outbreak intensified in China and surrounding regions.


Global equities

Momentum in global equities continued from 2019, with the MSCI World Index establishing new highs in the first 20 days of January. The signing of the ‘phase one’ trade deal between the US and China, combined with increasing conviction of a gradual recovery in global growth helped support global share markets.

That optimism was quickly snuffed out, however, on mounting fears over the coronavirus and its impact on Chinese, and hence global, growth.

From 20 January, the MSCI World dropped -3.1% in local currencies, to end the month down -0.2%. The AUD’s associated plunge helped insulate Australian investors in global shares from negative returns. In fact the Index ended the month up 4.4% in AUD terms, the strongest January return since 2013.


Global and Australian Fixed Income

The risk that coronavirus results in a prolonged economic slowdown was reflected in fixed income markets worldwide.

Government bond yields were pushed sharply lower in all key regions. US and Australian 10-year yields closed the month 42 and 41 bps lower, respectively, resulting in positive returns from overseas and domestic bond markets.

Moves in Europe were a little more modest, but were substantial nonetheless. In the UK, 10-year gilt yields dropped 30 bps, while German Bund yields closed January 25 bps lower. Japanese JGB yields also fell 5 bps.

Global credit

Credit spreads had tightened sharply in late 2019, resulting in favourable returns from both investment grade and high yield corporate bonds.

In January, however, concerns associated with the virus outbreak – specifically how a slowdown in activity levels might affect corporate earnings – saw spreads retrace some of this earlier movement.

A slowdown in China could have broader reaching implications for companies in other regions. Remember, China now accounts for around 16% of global GDP.

Unsurprisingly, issuers in Asia were among the worst performers. Chinese property companies with exposure to Wuhan, for example, fared particularly poorly.



Source: Colonial First State

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