Home / Economics / Economic Outlook: Part 2

Economic Outlook: Part 2

Despite being the secondary epicentre of COVID-19 the European experiment may be turning the corner, with unprecedented events finally delivering consensus on fiscal and monetary policy. This is not without pain, with the economy contracting 3.6% in March behind multi-decade record contractions of 5.3% in France and Italy and 5.2% in Spain. The ECB is predicted a 9% contraction in growth for the year.
Economics

Europe

Despite being the secondary epicentre of COVID-19 the European experiment may be turning the corner, with unprecedented events finally delivering consensus on fiscal and monetary policy. This is not without pain, with the economy contracting 3.6% in March behind multi-decade record contractions of 5.3% in France and Italy and 5.2% in Spain. The ECB is predicted a 9% contraction in growth for the year.

Unemployment has seemingly held up better than expected, increasing to 7.3%, though payroll programs and a lack of reporting are likely hiding the pain, particularly in the tourism focused areas. After an initial misstep, the ECB and member states appear to have got the message, rolling out an incredible stimulus, doubling quantitative easing to $1.5 trillion and ensuring cheap credit is made available to consumers and businesses alike.

The EU has come together, agreeing to share the burden and guarantee another $750 billion in debt used to fund the entire region from January 2021. Italy and Spain are set to receive 20% each and France 10%. Importantly, many of these will be structured as grants, rather than lows offering the greatest chance of recovery. A key focus of this policy and a signal for the future, has been the requirement for member states to commit these funds towards digital transformation and the transition to carbon neutrality, benefiting the clean energy and sustainable economies; a lesson for Australia.

  • United Kingdom

     The UK economy, one of the few that reports on a monthly basis, contracted the most since World War 2 in April, falling 20.4%. Officially, unemployment has remained low at 3.9%, however, this has clearly been delayed due to the Government’s decision to fund some 80% of most salaries via its Job Retention Scheme, not unlike our Job Keeper program.

    This program has meant UK’s stimulus of $66 billion exceeds that issued during the GFC, representing 2.5% of GDP. The central bank has responded by cutting rates to just 0.1% and engaging in QE totalling close to $250 billion in both Government and investment grade bonds.

    PM Boris Johnson is coming under increasing pressure for the poor handling of the COVID-19 outbreak but will likely survive despite an expected 10% contraction in the economy for 2020. However, the Government continues its transition away from the Euro Zone, with trade negotiations under way across the world including with Australia and India.

    India & Japan

    Japan is another recession, contracting 1.9% in December and a further 0.6% in the March quarter. Exports fell more heavily than imports, -6% versus -5%, and are likely to get worse before they get better. The Bank of Japan embarked on the world’s biggest stimulus, $1.1 trillion, despite the country dealing with the pandemic quite well.

    The stimulus package bodes well for the future particularly as global companies move away from China. They will be financing companies, offering rental assistance, boosting healthcare payments and maintaining yield control policies. Japan offers an insight into the future, as the concept of Modern Monetary Theory gains traction. Japan evidences the fact that inflation isn’t guaranteed as a result of running budget deficits and when rates are low there is little need to repay debt by raising taxes.

    The Indian economy managed to grow at a slower pace in March, 1.1%, with expectations of a 7.2% contraction ahead. The economy has all but frozen with stringent shutdown measures and weaker than expected stimulus announced thus far. Modi has taken the opportunity to direct funds towards the modernisation of key sectors of the economy including farming infrastructure, self-sufficiency and domestic coal mining.




    Print Article

    Related
    Higher inflation, recession more likely: Franklin Templeton

    Late July news of the Federal Reserve (Fed) increasing interest rates another 0.75% and a second negative quarter of economic growth (GDP) has created an uncertain environment for investors going forward. Adding to these concerns is China’s economic slowdown and Europe’s energy shock.  Stephen Dover, Chief Market Strategist, at the Franklin Templeton Investment Institute presents…

    Stephen Dover | 15th Aug 2022 | More
    Jones looks to shorten exam, improve ethics code

    Once the advice review is completed, the minister has asked Treasury to look at updating the ethics code and assessing the viability of a shortened adviser exam.

    Tahn Sharpe | 15th Aug 2022 | More
    AZ NGA dives into supply chain with Virtual Business Partners tie-up

    The Italian-backed group has teamed up with one of AMP’s largest advice businesses to take a major stake in the back-office services provider. It’s the first time AZ NGA has ventured beyond advice and accounting investment.

    Tahn Sharpe | 15th Aug 2022 | More
    Popular
    1
    Advisers urged to tread carefully with ‘wholesale investor’ status
    Staff Writer | 28th Jul 2022 | More
    2
    Top hedge fund award goes to L1 Capital
    Greg Bright | 13th Dec 2021 | More
    3
    MAX Award winners and the new world outside
    Greg Bright | 13th Jun 2022 | More
    4
    INDepth with Andrew Lockhart from Metrics Credit Partners
    The Inside Adviser | 30th Jun 2022 | More