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QUARTERLY ECONOMIC UPDATE: JANUARY – MARCH 2020
The first quarter of 2020 will forever be remembered for delivering one of the greatest health and economic shocks of all time. The economic damage was an inevitable consequence of governments worldwide taking unprecedented action to curb the spread of the novel coronavirus that emerged in China in December 2019. Never have so many people in so many countries experienced such major upheaval to their daily lives at the one time.
With numerous countries enacting harsh measures to reduce person-to-person spread of the virus, many sectors of most economies effectively ground to a halt. Tourism, travel, entertainment and hospitality were particularly badly affected, but the fallout will be felt far and wide for some time to come.
By the numbers
Financial markets (and many governments) were slow to appreciate the magnitude of the coronavirus threat. Major share markets rose steadily, setting record highs on 20 February, then, as the likely economic consequences of tackling coronavirus became apparent, markets plunged. From its peak of 7,163 the S&P/ASX 200 index fell to 4,546 on 23 March. A rally then saw the index rise to 5,077 at the end of March, 24% down from the start of the quarter.
In the US, the S&P 500 fell 34% from top to bottom. The MSCI All-Country World Equity Index dropped 35%. Both indices recovered ground at the end of the quarter to limit January to March losses to 18% and 21% respectively.
The Reserve Bank moved quickly to further cut interest rates to 0.25%. This is as low as the RBA is prepared to go, with the Governor indicating this rate will be with us for several years come. Partly in response, and partly due to investors seeking the relative safety of the US dollar, the Australian dollar plunged from US$0.66 US to US$0.55. It then staged a partial recovery to end the quarter at US$0.61. Falls against other currencies were less severe.
Governments around the world responded with programs that will, over time, pump almost unimaginable sums of money into the economy – hundreds of billions of dollars in Australia, trillions in the US. Banks have deferred some loan repayments, and many landlords will forgo rent payments.
The focus is on helping employers retain staff, to provide income support to people who do lose their jobs, and to assist pensioners. One aim is to minimise economic disruption now to facilitate a quicker recovery once coronavirus is brought under control. However, despite these economic initiatives, escalating public health measures saw thousands of businesses close in March, with job losses estimated to be more than one million.
While most of the economic stimulus measures were widely applauded, some concern was expressed over the ability of eligible people to withdraw up to $10,000 from superannuation this financial year, and again in 2020/2021. Withdrawing money from super at a time of depressed prices will likely have a major adverse impact on future superannuation savings, leading a number of observers to suggest that this option only be considered once all others have been exhausted.
Few silver linings
It’s difficult to find any silver linings in the clouds of the current crisis. While motorists may welcome the drop in petrol prices, due to oil falling from over US$60 per barrel to near US$20 per barrel, this is a sign of how hard the pandemic is hitting the economy. One small positive: with airlines grounded, people staying home and many industries closed, air pollution and carbon dioxide emissions are down.