In Australia, economic growth in the September 2019 quarter remained weak with annual growth at 1.7%.
Public sector spending and net exports contributed 1.1% each to annual growth but, concerningly, a decline in private sector spending, which accounted for 73% of gross domestic product (GDP) in the September quarter, reduced annual growth by -0.5%.
Business activity and confidence was below average as was consumer sentiment. This suggests weaker growth will likely persist in the short-term.
The bushfire disaster is also expected to be a drag on economic growth but the exact extent of the impact is uncertain. These factors are expected to see the Reserve Bank of Australia (RBA) cut interest rates at least once this year.
The landslide UK election win by the Conservative Party, led by Boris Johnson, saw a major risk for investors subside – the risk of a disruptive UK exit from the European Union (EU). The focus is now on his re-negotiated deal with the EU rather than the period of uncertainty experienced in the three years following the Brexit referendum in 2016.
We have also seen progress on US-China trade negotiations. This included President Trump deferring planned tariffs for 15 December 2019 after increasing tariffs on Chinese imports in early September. A ‘phase one’ trade deal was widely anticipated and signed on January 15, 2020.
Leading indicators of economic growth improved during the quarter. For example, The Markit Global Composite Purchasing Managers Index (PMI) reached an eight-month high pointing to stronger growth in the global economy in the short-term.
Weakness in the EU’s services sector prompted a restart of the European Central Bank’s asset purchasing program, also known as ‘quantitative easing’, which aims to increase the money supply and encourage lending and investment.
During the December quarter the Australian share market rose 0.7%. At a sector level, health care (up 14%) and energy stocks (up 6.3%) were strong and offset weak performance in the financial sector (down 7.8%).
The health care sector’s performance was driven by biotechnology company CSL whose share price rose 18% from $233.69 to $275.70 following a positive outlook for the 2020 financial year of 7 to 10% growth in profits. This growth is because of a supply squeeze on one of its core antibody product lines which is expected to push the product line’s price higher.
Energy stocks benefited from stronger oil prices following a decision by the Organisation of the Petroleum Exporting Countries (OPEC) to cut back on oil production.
The major disappointment among large companies was Westpac. The company saw its share price fall from $29.64 to $24.23, a decline of 18.3%. This followed a lawsuit by regulator Austrac over breaches of counter- terrorism and anti-money laundering legislation because of inadequate controls over international money transfers.
Fixed income and currencies
Bond prices fell, driving bond yields higher both here and overseas. This occurred despite the RBA cutting interest rates by 0.25% in early October. Normally it is expected that a reduction in interest rates would result in a rise in bond prices however positive global factors, including the Brexit resolution in late December and more concrete progress on US-China trade negotiations, saw bond prices fall.
This also saw investors seeking riskier assets such as shares. These drivers are likely catalysts for a stronger economic environment heading into 2020.
The Australian dollar also benefitted from these drivers even with the RBA rate cut which would normally contribute to the Australian dollar falling.