Economic update March 2020

3 min read

In the space of just a few months, COVID-19 has very quickly become both a medical and economic issue. Its global impact is only paralleled by the two world wars and the great depression in the 1930s.

During March, share markets experienced the sharpest decline most investors have ever witnessed, with many assets underperforming cash on a monthly basis for the first time in over 30 years.

It’s easy to get lost in the sheer volume of information you’re being asked to absorb around COVID-19. So, we’ve put together five key things you should know about how it’s affecting global economic activity.

1. Social distancing and self-isolation become the new norm

We all know COVID-19 originated in China, but its rapid spread into Europe surprised many. The Italian Prime Minister was the first to announce restrictions on freedom of movement – the most stringent in Europe since World War 2. 60 million Italians were told they could only travel for pressing reasons of work, health or other extenuating necessities (with written permission) as Italy became the first country to attempt a nationwide lockdown.

Many more countries have since followed, with Australia no exception, as businesses were forced to close their doors, homes became the new schools and workplaces, and global economies faced an uncertain future.

2. Swift positive action: Australian interest rates and the housing market

The Reserve Bank of Australia (RBA) cut interest rates at its March meeting by 25 basis points to 0.50%. Then in an extraordinary move, the RBA cut the official interest rate further to 0.25% on 19 March – the first time it’s cut rates outside its regular monthly cycle since 1997, indicating total commitment to softening the economic impact for Australia.

The RBA also broke new ground with its quantitative easing program (a monetary policy used to increase the supply of money to the economy, to try and boost inflation and avoid recession). It’s targeting the Australian 3-year bond yield at “around” 0.25%. Rather than buying a specified quantity of bonds, it will purchase Australian government bonds in the secondary market to support the smooth functioning of that market and support the non-financial sector, small lenders and securitisation markets.

It’s hoped this will also cushion the impact on our housing market. We’d seen strong signs of a recovery before COVID-19, but March results indicated a slowing of activity. However, there was still an upsurge in dwelling approvals and house prices, with CoreLogic reporting prices increased by 0.7% in the collective capital cities, and 8.9% annually.

3. An unsustainable surge: Australian consumer and business confidence

Pharmacies, supermarkets and takeaway services received a significant increase in spending as consumer rushed to stock up on essential items in March. But strict social distancing rules are expected to slow the surge and impact broader retail spending overall. Consumer confidence declined 3% month-over-month to a 5-year low of 91.9, according to the Westpac Consumer Sentiment Index.

Business conditions also deteriorated in February as the immediate impact was felt on supply chains and service export sectors like tourism and education. The NAB business condition index fell 2 points to 0, the lowest since May 2014, and business confidence fell 3 points to -4. While both indices are at multi-year lows, they do remain significantly above the level recorded throughout the GFC.

4. Global governments react with historic stimulus packages

The Australian Government wasn’t alone in taking action to protect its economy.

  • The US Federal Reserve (Fed) announced two emergency rate cuts during March, taking the effective federal funds rate from 1.10% to 0.05%. US congress and the Trump administration also agreed on a ground-breaking US$2 trillion stimulus package, which equates to 10% of GDP. The Fed asserted it was “not going to run out of ammunition” and was determined to build a bridge over a substantial decline in the economy.

  • The Bank of Japan (BOJ) doubled its annual equity-buying target to ¥12 trillion (US$112 billion / 2% of GDP) and rolled out a new lending facility. Interestingly, it opted not to lower interest rates further below zero with the priority instead to provide smooth corporate financing and stability to financial markets.

  • The European Central Bank expanded its monetary policy easing measures, including additional long-term funding, refinancing operations and more favourable financing terms.

  • The Bank of England cut its key rate twice in March, initially by 50 basis points and then by 15 basis points to finish at 0.10%. An additional £30 billion stimulus package includes a £7 billion to support businesses and individuals, with a £5 billion emergency response fund.

5. The good, the bad and the ugly of global trade

Restricted travel, unemployment and disrupted supply chains all took their toll as industries and businesses struggled to adapt to the sudden change.

The good

After China successfully flattened its COVID-19 curve, manufacturing recovered too, with the Caixin PMI index at 50.1 in March, up from 40.3 in February, indicating businesses are gradually recovering. Overall activity remains weak however, and will likely remain so, particularly for those businesses that depend heavily on export demand, as COVID-19 continues to affect other economies in the region.

The bad

The University of Michigan’s consumer sentiment survey was revised down to 89.1 in March from 101 in February – the fourth largest decline in nearly half a century. US unemployment soared, with initial jobless claims for the 3rd week of March at an historical high of 6.65 million, surpassing the previous high set during the GFC at 654,000.

Japan’s Tankan Survey also indicated conditions for both manufacturing and non-manufacturing sectors deteriorated in the first quarter of 2020.

The ugly

European countries are bracing for a severe economic impact. European headline inflation steadied from an annual rate of 1.2% in February to 0.7% in March, the lowest in 5 months, and prices are likely to be held by weak demand and plunging oil prices from the Saudi-Russia production spat.


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Information current as at 16 April 2020. 

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