There’s no doubt that the financial landscape has had an interesting run this last financial year. So as FY 2021 comes to a close, let’s unpack what has been happening in the COVID-normal economy in the June quarter.

Global

The COVID-19 pandemic continues to have a major impact on the global stage. Although the JP Morgan Markit Global Composite PMI remains positive and global economic recovery continues.

News around inflation has been mixed. Businesses in the US were still affected by movement restrictions, and prices have been driven higher following 2020 lockdowns by a stronger demand for goods. It remains unclear as to what will be the impact on inflation of more permanent triggers such as rising wages. The Atlanta Fed median wage growth tracker has lowered in recent months (suggesting limited worker bargaining power) and the participation rate for workers is still well below pre-pandemic levels (suggesting there are still many sidelined workers). 

Local 

For most of the June quarter, the Australian economy continued to improve. Business and consumer confidence remained strong, the NAB Business Survey showed business conditions are at record highs and confidence is above long-term average levels. Unemployment continues to decline and in May was down to 5.1%. Positively, we saw the labour force participation rate recover above pre-pandemic levels as workers returned to the workforce (a sign of growing confidence in job prospects). Household savings rates continued to fall, from 22% in June 2020 (a record high) to 11.6% in March 2021. 

In June, the Delta strain of COVID-19 caused widespread lockdowns across the country, most severely in Sydney. The attempts at government support were limited in comparison to the initiatives of 2020, such as JobKeeper. Unfortunately, the fallout from these lockdowns poses a risk to the local economy and is still to be determined.

Fixed income and currencies 

The US Federal Reserve has maintained a commitment in the near term to keeping interest rates low. Although the US Federal Reserve flagged a possible 0.5% increase in 2023.

In Australia interest rates are at a record low of 0.1% and the Reserve Bank of Australia (RBA) maintains the economy won’t be strong enough to increase that rate until 2024.

The RBA also ended its emergency support program for Australian banks (Term Funding Facility), triggering a rise in fixed mortgage rates across most major banks as they lost a cheaper source of funding. Furthermore, the RBA announced it will gradually lower its activity in the bond market.

Global and Australian bonds recovered from their weak performance in the previous quarter, up 0.9% and 1.5% respectively. The prospect of higher US rates wasn’t enough to reduce the demand amongst investors for bonds.

The Australian Dollar (AUD) was improving in line with the economic outlook for most of the quarter. But in June, the COVID-19 lockdowns and the change in the expected US interest rate decreased the appetite for the AUD given the lower relative interest rate. As a result, AUD fell 1.3% against the US Dollar and 1.9% against a range of international currencies.

Shares

The Australian market finished the June quarter up by 8.3%, continuing to improve from its March 2020 low. Buy-now-pay-later businesses such as AfterPay showed a strong performance, growing by 16.4%. Utilities battled weak wholesale electricity prices, causing AGL to fall by 15%.

On a global level, share markets also performed well. The successful vaccine rollout in the US and Europe were key factors in this. The tech-heavy Nasdaq Index outperformed the broader US share market, particularly seeing a rise late in the quarter.

The world economy is ever-changing and life is unpredictable. That is why discussing your personal financial goals with a financial expert is so important. Book a discovery call with us: We help you meet your financial goals.

Source: Financially Speaking Spring Edition 2021