August 2020 Insights

August is here and the wattle is in bloom, a sign that spring is around the corner. Australians will all be hoping for brighter days ahead, as we contend with rising COVID cases and sobering news on the economic front.

After postponing the Federal Budget until October due to COVID, the government released a budget update on July 23 which gave an insight into the economic impact of the health crisis. It estimates a budget deficit of $85.8 billion in 2019-20 (4.3% of GDP) rising to $184.5 billion in 2020-21 (9.7% of GDP). This would be the biggest deficit as a share of GDP since 1946 in the aftermath of WWII. The economy contracted an estimated 0.25% in 2019-20, with a further fall of 2.5% in 2020-21, the first consecutive annual falls in over 70 years.

Unemployment rose from 7.1% to 7.4% in June, the highest in almost 22 years. The jobless rate is expected to peak at around 9% in December before it begins to fall. As a result of the economic slowdown, inflation fell 1.9% in the June quarter (minus 0.3% on an annual basis), the biggest quarterly fall since 1931 during the Depression. The biggest price falls were for childcare, petrol, primary education, and rents. This was reflected in falling consumer confidence, with the ANZ-Roy Morgan confidence rating falling to a 13-week low of 89 late in the month (the long-term average is 112.8 points).

On financial markets, gold rose to a record high of US$1975 an ounce in July, reflecting its role as a defensive asset in difficult times. Crude oil prices inched up 1% in July but are down 25% over the year. And in good news for Australian exports, iron ore prices rebounded 8% in July (down 7% for the year). The Australian dollar continued to climb, closing the month above US72c.