With much to ponder, global markets pulled back as GM announced it was pulling the plug on Australia’s most iconic car brand
22 February 2020 | Shane Oliver, AMP Capital
Chinese shares managed to rise 4.1% though as China continued to roll out new stimulus measures.
Australian shares also rose, although only by 0.1% but they did hit a new high helped by better than feared profit results and renewed talk of RBA interest rate cuts. Bond yields fell on growth fears, but commodity prices rose with oil up on supply concerns and iron ore up on Chinese stimulus measures.
The Australian dollar fell to just below $US0.66 at one point to its lowest in over ten years on fears of a big hit to Australian exports from the coronavirus, increased talk of RBA rate cuts and as the US dollar went up on safe haven demand.
The $A is likely to fall to around $US0.65 as the coronavirus outbreak depresses Australia’s exports and the RBA eases further but then drift up a bit as global growth improves to end 2020 little changed.
The plunge in the Australian dollar will make the nation more competitive internationally will act as a shock-absorber for the blow to exports from the coronavirus outbreak. This partly also explains why the Australian share market is at or around record levels.
Of course, there is much uncertainty about the case data, new cases outside China still looks to be trend up and the economic flow on has further to go with the Chinese economy likely to have contracted in the March quarter and so too for the Australian economy.
Roughly 50% of China’s GDP is under lock-down and so far this has been the case for three weeks which means nearly 12% knocked off Chinese GDP this quarter.
With the knock on to supply chains globally this could see world GDP stall or go negative in the current quarter. We are also expecting Australian GDP to contract this quarter by around -0.1%.
But if it is contained soon then growth will rebound in the June quarter and share markets will largely look through it. With some signs the number of new cases is peaking, this remains our base case.
China economic data
Chinese credit rose more than expected in January possible reflecting People’s Bank of China (PBOC) efforts to offset the impact from the coronavirus outbreak, although annual credit growth slowed slightly. Meanwhile China home prices showed continued modest growth in January.
Chinese policy stimulus measures continued to ramp up with more rate cuts and plans to cut more corporate taxes and fees. This could supercharge the post COVID-19 growth rebound when it comes.
Major global economic events and implications
US economic data was mostly good with strong home builder conditions and housing starts, gains in manufacturing conditions in the Philadelphia and New York regions, continuing low jobless claims and a rise in the leading index for January.
February US business conditions PMIs fell sharply likely reflecting concerns about the impact of COVID-19 on the economy, though Eurozone business conditions PMIs and consumer confidence surprisingly improved in February.
Japanese GDP fell sharply in the December quarter thanks to the hit from the GST hike in October, while composite business conditions PMI fell sharply in February. Core inflation also fell back to 0.8% year-on-year in January.
Australian economic events and implications
Australian data was soft and points to the need for further policy stimulus. While employment rose by slightly more than expected in January and full-time employment rebounded after three weak months, annual jobs growth slowed to its weakest in nearly three years.
The total number of hours worked slowed, unemployment rebounded to 5.3% and underemployment rose to 8.6% which combined to push labour underutilisation to 13.9%.
With job vacancies and other forward labour market indicators pointing to a slowdown in jobs growth below the 20,000 a month needed to absorb new entrants to the workforce unemployment is likely to drift up. The CBA’s business conditions PMIs also weakened sharply in February consistent with the coronavirus outbreak weighing on economic activity this quarter.
With Australia stuck a long way from full employment (which is probably well below 4% for the headline unemployment rate), wages growth which was just 2.2% through last year is likely to remain weak and underlying inflation is likely to remain well below target.
The bottom line is that more policy stimulus is required; ideally this should come in the form of more fiscal stimulus.
However in the absence of additional government spending the pressure falls back on the RBA, which is likely to have to act on the easing bias that it again reiterated in its February board meeting minutes despite the risks associated with further easing.
So, we continue to see another rate cut in either March or April and the cash rate falling to 0.25% by mid-year.
GM retires Australia’s Holden brand
The demise of the Holden brand was sad news. My parents drove Holdens. My first reliable car was a Holden. And I have had three since 2001 including the 2017 model I drive now.
Unfortunately, the brand died in 2017 with the end of local production and to be honest I think Australians killed it by shifting their demand to imported SUVs.
There is no point blaming foreigners, for the end of Australian car brands, as some like to do!
Hopefully someone will resurrect the brand and produce retro Monaro’s and Statesmen’s in Elizabeth, SA, for the few die hards like me!
Dr Shane Oliver is Head of Investment Strategy and Chief Economist of AMP Capital
