Economic update February 2020

3 min read

Over the month of February, we saw the Coronavirus (COVID-19) threaten to derail the revival in global economic growth which began in the latter part of 2019. Domestically, the current account recorded its 3rd consecutive surplus. Unemployment rates moved further away from the RBA’s goal. Equities were under pressure as the month closed, with the largest weekly declines since the GFC.


The Coronavirus is spreading across the world, with four epicentres other than China; Iran, Italy, South Korea and Japan. Australian Prime Minister Scott Morrison has labelled the COVID-19 outbreak a ‘global health crisis’, warning that economic impacts are stretched across further than just the education and tourism sectors – disrupting supply chains, construction and manufacturing. Treasurer, Josh Frydenberg, upon his return from a G20 finance ministers’ meeting in Saudi Arabia, has acknowledged the economic hit from the virus outbreak could be worse than the bushfires amid fears that the “shutters could come down on the global economy”.

For the first meeting of the year, the Reserve Bank (RBA) left the cash rate on hold at a record low of 0.75%. Following on the decision, the RBA hinted its key forecasts would remain broadly unchanged. The Quarterly Statements on Monetary Policy hinted an optimistic forecast for economic growth this year; expecting growth to return to trend in 2020 after a sub-par 2019. GDP is expected to be 2¾% over 2020 and 3% over 2021. Clearly, with recent events as markets moved into March has abated much of this optimism.

The Westpac-Melbourne Institute Index of Consumer Sentiment rose 2.3% to 95.5 in February from 93.4 in January. Despite improvements this month, the index remains below the long run average of 101.4 and firmly in pessimists territory (readings below 100 indicate that pessimists outnumber optimists). The unemployment rate has jumped to 5.3% - from 5.1% December – further distancing from the RBA’s goal of a 4.5% unemployment rate. This is after two consecutive improvements during the end of last year. The increase in unemployment was due to a rising participation rate, being up 66.1% in January, from 66.0% in December. Wages growth remained sluggish in the December quarter despite the spare capacity in the labour market.

The Australian economy posted a modest 0.5% increase in Q4. Annual growth increased to 2.2%, although up from 1.8% in Q3, it remains below trend which is around 2.75%. Furthermore, the current account registered its third consecutive surplus in Q4 – the first time since 1973. The surplus printed $0.96b - representing 0.2% of GDP - narrowing down from $6.5bn in Q3. Falling prices of commodities and deterioration of terms of trade have put sinking pressures on the surplus. The terms of trade index fell 5.3%, led by a 6.5% fall in the goods index over the quarter. On annual basis, the terms of trade ended 2019 slightly lower by 0.6%. The Australian economy may suffer a bigger dip due to the overwhelming importance of China in Australia’s trade in goods and services as restriction in global supply chains drag.

United States

The US Centre for Disease Control and Prevention (CDC) issued a statement warning Americans to prepare for the spread of the coronavirus on US soil. It advised that there would be a significant disruption to daily life if the virus spread, and said that the US is taking an emergency plan that closely resembles action taken from other countries. US Federal Reserve’s Charles Evans said central bank officials are observing the situation. Furthermore, Fed Chairman Jerome Powell said the virus “poses evolving risks” to US economic activity.

The US GDP remained unrevised at an annualised rate of 2.1% in Q4 of 2019, compared to 3.1% in Q1.However, the underlying US demand in the economy was slower than reported.  The trade deficit in goods narrowed to US$65.5 billion in January from US$68.7b in December. Import levels sank faster than exports.

The University of Michigan’s headline consumer confidence index rose from 99.8 in January to 101.0 in February – the last highest rate was in March 2018. From the statistics, consumers seem to be disregarding COVID-19 threats, however this may be temporary as number of US cases and fatalities reported is rising. Consumer spending had a 0.2% rise in January, compared to 0.4% in December. The Core Personal Expenditure (CPE) deflator rose 0.1% in January, while year-end growth rose 1.6% up from 1.5% in December 2019. The US Federal Reserve target is 2% per annum. Pending home sales rose 5.2% in January, reversing course from December’s decline. Housing supply and mortgage rates are low, aiding demand.


Extreme quarantine restrictions have begun the shut down of factories and public gatherings across Asian regions. Containment efforts has affected demand and supply chains on manufacturing as companies are running below capacity with higher shutdown periods. Asian countries such as Japan and South Korea have outlined fiscal measures to aid affected sectors.

The People’s Bank of China (PBoC) is putting emphasis on keeping monetary policy flexible as its steps to supports the real economy. It will continue to implement financial policies designed to support epidemic prevention and control efforts, including strengthening countercyclical adjustments of monetary policy and ensuring stable functioning of the financial markets. Short-term, the authorities have made corporate loan conditions easier by reducing rates.

China is on track for its worst first-quarter performance on record, with the latest figures set to inject fear into already volatile share markets. The Caixin measure for the manufacturing purchasing managers’ index (PMI) fell to 40.3 in February – the lowest level since the survey began in April 2004 - from 51.1 in January. Non-Manufacturing PMI tumbled to a record low of 29.6, while the Services PMI plunged to 26.5 in February from a 51.8 in January.

The Japanese economy shrank -1.8% in the December quarter, following a downwardly revised 0.1% growth in Q3. It was the steepest falls in GDP since Q2, 2014. Department stores fell 2% over the year to December. Japan’s trade deficit narrowed to JPY 1.31 trillion in January 2020 from JPY 1.42 trillion in the same month, last year. It marked the third consecutive month of trade deficits. The low value is due to decreased shipments of car and machines to the US and car part sales to China.


British Prime Minister Boris Johnson has threatened to walk away from Brexit talks in June if significant process has not been made. The UK’s negotiating mandate has been published. Johnson has rejected European demands to submit to independent oversight of Britain’s laws. Britain’s chancellor, Sajid Javid, has quit weeks before the scheduled annual budget statement, in a shock move provoked by Prime Minister Boris Johnson’s attempt to shake up his cabinet after Brexit. Javid was replaced by 39-year old deputy Rishi Sunak. Former Brexit Minister Steve Barclay took over Sunak’s position as chief secretary to the Treasury.

The UK received an update to its annual GDP growth for 2020 to 1.1% - from 1.2% in Q3 and 2% in Q1 of 2019. Companies have reduced stock levels more aggressively than anticipated at the end of 2019, removing this year’s potential drag. The Office for National Statistics (ONS) reported that UK retail sale volumes increased by 0.9% in January, reversing a 0.6% decline in December. Drawing a line under the worst recorded year for retail sales in 2019, the value of goods bought also increased after the amount spent rose by 1.2%.

In response to the Coronavirus, European Central Bank’s Christine Lagarde said that the outbreak is not at the stage where it requires a monetary policy response and that they are still monitoring the situation. The Italian economic minister announced a €3.6 billion stimulus package to mitigate the impact of the coronavirus outbreak to affected areas. The Eurozone economy grew 0.1% in Q4 of 2019, compared to 0.3% in Q3. There was zero German growth due to the challenges given its close trading ties with China. Eurozone consumer confidence rose from 102.6 in January to 103.5 in February. January’s unemployment rate showed a reduction to a decade low of 7.4%.

For a more detailed summary, click here.

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Information current as at 29 February 2020. 

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