Making sense of interest rates, coronavirus and Holden

With interest rates expected to move lower, and potential for equities to outperform bonds, the economic outlook for 2020 provides a rich road map for the year ahead.

Speaking at the HUB24 webinar titled Economic and Market Outlook, BetaShares Chief Economist, David Bassanese, predicted Australian interest rates could be cut by a further 50 basis points if unemployment moved from current levels of 5.1% to 5.4% or 5.5%.

“Interest rates are dependent on the unemployment rate.”

Further, retail spending and consumer confidence continue to be quite cautious despite the low interest rate environment and a housing market rebound.

“I don’t think retail spending will rebound because of a weakness in income growth.”

On the international front, with an easing of trade tensions between US and China and President Trump effectively removing tariffs as an issue for Wall Street, coronavirus has now stepped up as a new challenge.

“Global markets are trying to look through the impact of coronavirus,” said Bassanese. “China is clamping down on travel and trade restrictions are being applied. There are a lot of products produced in China.”

Reports are emerging that outside of the affected capital, Wuhan, rates of new infection are now declining. Bassanese says based on tentative signs of containment, the coronavirus should have a “short and sharp hit on the global economy”.

Interestingly, when compared to the SARs virus which hit between February to May in 2003 (SARs had a 10% fatality rate compared to coronavirus of 2-3%), tourism to Australia declined by 80% during this period.

“Chinese tourism is five times more important to Australia than tourism from the US,” he said. “So coronavirus might have a short run, but it will have a big impact.”

In locals news overnight, Holden announced its plans to cease its operations in Australia and New Zealand raising questions over the performance of the Australian economy.

Bassanese noted that Holden ended local car production some time ago and it was the remaining design and distribution parts of the business that will now be closed – which, in his view, seemed an inevitable follow up move at some stage.

“I don’t think the decision necessarily reflects a judgement on the weakness of the Australian economy, but rather the viability of maintaining a brand that had lost the support of the local population.”

You can watch our recent HUBsights webinar with David here.