Australia fell into its first recession in nearly 30 years as the nation battles a resurgence of Covid-19. Gross domestic product shrunk 7% in the second quarter, the largest fall since records dating back to 1959. On an annual basis, GDP declined by 6.3%. Following the data announcement, the Australian dollar fell 0.5% to $0.7342. The country joins the United States, Japan, UK and Germany in technical recession having fallen 3% in the first quarter of 2020. Australia’s second most-populous state of Victoria remains in a lockdown to curb the spread of the coronavirus while international borders are also shut. More than a million people have lost their jobs and the government has injected over A$300 billion of stimulus to battle the pandemic, while the Reserve Bank of Australia slashed interest rates to a record 0.25% in March and yesterday it expanded its cheap funding facility for the country’s lenders to keep low-cost credit flowing in the economy.
US manufacturing activity climbed to a nearly two-year high in August helping the USD bounce off two-year lows also helped by news that a Covid-19 relief bill might come in next week. The greenback has declined 1% since last week’s FED announcement that it would focus on average inflation and higher employment. FED’s shift in policy and commitment to keep interest rates lower for longer has encouraged traders to sell the currency. The euro benefited from the dollar sell-off rising to $1.2014, its highest since May 2018 but has now fallen back to $1.1855. Against the Japanese yen, the dollar was little changed at 106.20 yen. The New Zealand dollar added 0.3% after governor Adrian Orr said the central bank’s actions have been effective in lowering interest rates.
German retail sales fell unexpectedly in July dampening hopes that household spending will drive a strong recovery in the third quarter. Retail sales were down by 0.9% on the month but 0.9% higher than February suggesting that this sector of the economy managed to recover relatively quickly in a V-shaped development. In the first seven months of the year, retailers increased their sales by 2.6%, despite the crisis. The German economy contracted by a record 9.7% in the second quarter leading the government to borrow 217.8 billion euros in order to help companies and consumers recover from the crisis. The government revised its 2020 forecast yesterday expecting the economy to shrink by 5.8% this year.
European shares opened higher this morning having suffered losses for four consecutive sessions, largely because of a strong euro. Eurostoxx 50 regained around half of its weekly losses helped by a rise in media and entertainment stocks. The German DAX has also climbed back near pre-pandemic levels. London-listed shares also rose as sterling retreated to $1.3341 with investors betting on a faster economic recovery following upbeat manufacturing data from China and the US.