Economic outlook

Quarterly economic review – 31 March 2021

The global economy

The COVID-19 pandemic remains a major feature on the global stage. Continental Europe has struggled against the more infectious UK strain. Its vaccination rollout has been plagued by logistical challenges and concerns over the AstraZeneca vaccine’s ties to a rare blood clot disorder. These concerns did not slow the vaccine rollout in the US and UK which appear to be nearer the end of the pandemic’s damaging human and economic impact. Despite the ongoing threat of the pandemic, global economic recovery has continued with current lockdowns having a less severe impact overall.

In the US, a new $US1.9 trillion stimulus program was passed by the Biden administration. This includes payments for households such as a boost to unemployment benefits and $350 billion to support state and local governments. These efforts have prompted some fears over rising inflation as a result of excessive spending. To-date, those fears have not yet materialised. We will however see inflation rise as a normal part of economic recovery as people and businesses grow their confidence in the economy, they can start demanding higher wages and higher prices from customers.

Australia

The general state of the Australian economy continues to improve from the damage of the 2020 lockdowns. The unemployment rate continued to fall, down to 5.8% in February and pleasingly we saw the participation rate recover back to pre-pandemic levels. Consumer confidence remains strong, supporting the idea that consumer spending can help drive the economy in the near term as people gain confidence to spend some of their excess savings with household savings hitting record levels in June last year.

Small COVID-19 outbreaks, such as in Brisbane, remained a feature that prompted short and sharp lockdowns but without escalating further. The vaccine rollout has become challenging due to a mix of overseas supply problems and issues with distribution and planning. Concerns over the AstraZeneca vaccine saw it effectively pulled as an option for Australians who are under 50. This is disappointing news but will not likely derail the economic recovery. It does however leave us vulnerable to further COVID-19 outbreaks particularly without the safety net of government stimulus programs such as the JobKeeper wage subsidy. It also delays efforts to reopen international borders with the tourism and education sectors, which are reliant on overseas travellers and students, remaining under pressure in the near-term.

Fixed income and currencies

Global central banks such as the US Federal Reserve maintained a commitment to keeping interest rates low for the next few years. The Reserve Bank of Australia restated its view that it will take until 2024 before the economy is sufficiently strong enough to increase interest rates from their record low level of 0.1%.

The prospect of stronger economic growth meant there was a reduced need to ‘hide’ in bonds. This saw investors exit safer investments such as government bonds in favour of riskier assets such as shares and high yield bonds. These moves by investors saw Australian bonds return their worst quarter since June 1994 with a loss of 3.2%. International bonds fell 2.5% over the same period.

It was a more uneven story for the Australian Dollar. The improvement in UK and US prospects following successful COVID-19 vaccinations saw our currency fall versus the US Dollar and the British Pound. Conversely, our better handling of the pandemic amid a surge in cases in both Europe and Japan continued to support our dollar against their currencies.

Shares

The Australian market continues to rise from its March 2020 lows, finishing the March quarter up 4.3%. It was another three months marked by optimism over global economic recovery which benefitted companies profiting from a reopened economy such as tourism operator Flight Centre (up more than 13%). Australia’s management of the pandemic supported overall economic health and also reduced financial stress for individuals. This means a failure to repay loans is less likely. This also supported the outlook for bank profits, and dividends, and helped the banking sector start the year strongly.

Global share markets also performed strongly with the successful vaccine rollout in the US being a key driver. Declining COVID-19 cases and fatalities spurred a surge of optimism for US shares especially with companies more sensitive to economic growth that tend to outperform the market.

Source: IOOF