Economic and Financial Market Update: The Second Wave

Summary:

• The rise in new COVID cases is a worry;
• By global standards Australia has dealt with the health crisis well;
• The size of the hole in Q2 GDP growth in many countries was as large as expected;
• The 'second wave' hitting Australia has led to downward revisions to H2 2020 GDP growth forecasts;
• And upward revisions to unemployment rate forecasts.

The recent events both domestically and globally have underlined the importance of first solving the health crisis. Despite the relapse Australia has still handled the virus well by global standards. There was always a risk of the re-emergence of the virus given there is no vaccine, the vast bulk of the population is susceptible and it is a very contagious disease.

As expected the virus has had a significant economic impact. Even when a region/economy gets on top of the health crisis, problems remain. In Australia the signs of scarring to the domestic economy are very visible, with inflation too low and the unemployment rate too high.

Increased consumer and business caution is evident in saving behaviour. As they have prior to previous recessions the household saving ratio was rising heading into this downturn. This increase in saving has led to a notable rise in deposits over recent months. Some of this run-up of deposits can be expected to be unwound in coming months.

In the longer term it has been suggested that there will be a rise in saving across the community reflecting increased caution amongst households and business. This thesis is a possibly but not a certainty.

At the end of the day consumer and business behaviour will be driven by the economy. Economic growth will improve. But it increasingly looks likely that improvement will be slow. In its recently released quarterly monetary policy statement, the RBA forecast a decent bounce in the economy next year (although the height of the bounce has been revised lower). The longer period of weaker growth will mean that the labour market will be softer for longer.