Monthly Wrap: August 2020
The world economy continued its upward, if uneven, recovery in August – much to the relief of world governments and financial markets, explains Senior Investment Manager George Lin.
After spending months in lockdown to curb Coronavirus, many countries have been able to assess the impacts on their economies – a cost shock that has led some nations, including Australia, into recession. This may sound concerning, but as the Investments team explains, expansion and contraction in an economy is normal – meaning recessions form part of a regular economic cycle.
In Australia, a recession is often defined as two consecutive quarters (or six months) of contraction –a significant decline in economic activity. However, two quarters of contraction alone is not always enough to determine a recession; a number of key indicators may also be considered before a recession is officially declared, such as increased unemployment, decreased business and consumer spending, financial market volatility, and lower gross domestic product output (referred to as GDP – a leading economic indicator that measures the sum value of all goods and services in an economy).
Because of its contagious nature, Coronavirus led to social-distancing and lockdown measures that shut down much of the world’s economy, including Australia’s – and this has had an impact on Australian life. So, is Australia experiencing a recession? Based on the technical definition of two consecutive quarters, as well as government confirmation, yes – Australia is in a recession. Data from the Australian Bureau of Statistics has provided more insight into the state of the economy:
So far, Australia has fared better compared to some other countries – with the UK contracting 20% and the US contracting 10% over the June quarter. According to the Reserve Bank of Australia (RBA), while the Australian economy is experiencing its biggest economic contraction since the 1930s, the downturn is not as severe as previously anticipated. With a gradual – albeit uneven – recovery underway across most of Australia, the RBA’s baseline future scenario includes:
The depth of this recession and the speed of an economic recovery are uncertain at this time – and this could continue to be the case until a vaccine is developed and distributed. But it may be helpful to remember that although Australia is not out of the woods, the country’s last recession lasted less than two financial years (1990–1991) – followed by nearly 30 years of economic growth thereafter.
Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (Colonial First State) is the issuer of super, pension and investment products. This is based on the understanding of current regulatory requirements and laws as at September 2020. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State or any member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. This document provides information for the adviser only and is not to be handed on to any investor. It does not take into account any person’s individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) before making any recommendations to a client. Clients should read the PDS and FSG before making an investment decision and consider talking to a financial adviser. The PDS and FSG can be obtained from colonialfirststate.com.au or by calling us on 13 18 36.
Financial markets showed resilience last month – even with record numbers of new Coronavirus cases, signs of struggle in the US economy, and ongoing tensions between the US and China. Hear from Senior Investment Manager George Lin, who recaps key developments over the month of July.
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