January 2020 – Economic Snapshot
January was a dramatic month for the world economy and financial markets, starting with hostilities between the US and Iran and ending with fears about the new coronavirus (2019-nCoV) from China. Here in Australia, we had the extra difficulties from the terrible bushfires. Despite all this, the Australian equity market had a great month, more than making up for a desultory December and outperforming global counterparts. The weaker $A and stronger performance from bonds helped our equity market, though more so in the non-resource sectors.
The price of oil fell sharply on global growth fears associated with 2019-2CoV, while the price of gold rose. Global equities gave up their gains for the month. The world economy continued to stabilise after the weaker tone through much of last year, especially in manufacturing. However, it is still not clear that stabilisation will soon be followed by a meaningful recovery.
In the US, the Democrat-controlled House of Representatives voted to impeach President Trump, but, amid much acrimony, the Republican-controlled Senate is set to exonerate him. Preparations continued for the Democrat primary race to choose a Presidential candidate. Biden and Sanders appear to be the leading contenders at this stage. In the UK, three and a half years after the initial referendum, Parliament finally passed the legislation to enable Britain’s exit from the EU.
Key developments in January
January was a dramatic month for the world economy and markets. Initial nervousness about the exchange of fire between Iran and the US at the start of the month eased after both countries stepped back from escalating the conflict. Although tensions between the US and Iran will persist and bubble over from time to time, at the moment they are not the markets’ prime concern.
The sudden emergence of the Wuhan coronavirus, officially designated 2019-nCoV, has been a major shock to the markets. It will be a significant drag on global growth, especially via China and its trade connections, but the final impact will be unclear until we can see when the spread of the virus has peaked and how far it will have reached at that point. The authorities in China have acted much more swiftly to contain and manage the virus than they did with SARS in 2002. This, plus the global effort to find a vaccine, gives hope the outbreak will be short-lived and contained. If so, then the impact on the global economy will be limited. However, if it continues for several months and spreads widely, then markets will inevitably start to worry about global recession again.