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Australia's Path to Economic Recovery is Painful Despite Getting COVID-19 in Check

Australia's Path to Economic Recovery is Painful Despite Getting COVID-19 in Check

Published: November 17th, 2020

 Victoria, Australia, marked the 14th straight day without a new coronavirus case on Friday, November 13. This news indicates that the Land Down Under now has the pandemic under control. Despite the milestone, the path to economic recovery is anything but smooth.

After a tumultuous period characterized by a series of lockdowns, some 25,000 cases of coronavirus infections, and about 1,000 deaths, Australia has emerged from the ordeal a victor. Victoria, the country's state on the southeast, with its population of some 7 million or so individuals, recorded the 14th straight day without new infections of the fast-spreading disease.

Despite the good news, recently released retail sales and employment data reveal that the path to recovery may be a lot painful that experts want to admit. The information about coronavirus containment only seems to be the country's price for the stringent lockdown measures it enforced a few months ago.

Besides, the impressive news was quickly masked by the spread of the disease in other regions worldwide. The U.S. and Europe, in particular, are pressed at the moment with the world inking more than 600,000 news cases every day.

On Thursday, November 11, the world saw a record of 9,659 deaths. Slightly more than 10% of these fatalities happened in the U.S., while Europe collectively accounted for about 40%. Back in Australia, the picture is rosy with an average daily record of just ten new infections.

AUD/USD on Higher Ground with Zero Directional Momentum

The Aussie seems not to have read the sentiment right, closing the week at 0.7250, resting right about where it opened the week. The currency pair's movement indicates that it was a dull week, which seemed consistent save for the minor market developments.

AUD/USD only once surged to 0.7339, the week's peak, before losing ground. However, it managed to stay above the 0.7200-mark for the entire week. Currency pairs often follow market sentiments and equities' movement.

Consequently, the Aussie's peak was on Monday, November 9, when the American drug maker, Pfizer, announced a 90% efficacy on its vaccine candidate. The same news that sent stocks skyrocketing. However, the market sentiment created by the exiting news backed the clamor for the dollar and prevented the Aussie from any significant surge.

Meanwhile, U.S. elections and the ensuing political turmoil seem to have little effect on the pair.

With Joe Biden looking poised to be the 46th U.S. President, investors have quickly migrated away from the uncertainty caused by the incumbent's obstinacy. President Trump's failure to concede the elections is throwing the transition into chaos at a time when the coronavirus infections are surging by record numbers.

Markets may have to wait until early December for a clearer picture after the various states have ratified the elections' results. At least then, the declarations will be official, forcing the hands of the state agencies currency doing Trump's bidding, to officially kick off the transition process.

Phlegmatic and Unenthusiastic Macroeconomic Climate

Australia published the National Australia Bank's (NAB) Business Confidence report, which improved from -4 in September to 5 in October. However, the November Westpac Consumer Confidence contracted from 11.9% to 2.5%, which is way off the forecasted figures.

The lukewarm sentiment was exacerbated by the unavailability of other critical microeconomic data. On the flip side, the Consumer Inflation Expectations, released on Friday, November 13, stood at 3.5%, 0.3% above the forecasted figure.

Despite the sluggish pace, the Reserve Bank of Australia reduced the benchmark rates to record lows earlier this month. Besides, the bank mentioned that it would do anything to help the country recover, including providing any support the economy might need.

Market experts expect the situation to brighten up in the week beginning Monday, November 16, when the central bank governor, Philip Lowe, addresses the current problem. During the same week, China will publish the October data for Retail Sales and Industrial Production.

The eventful week will also see Australia's central bank publish the minutes of its last policy meeting. The release will coincide with the U.S. Census Bureau's timing to publish October's Retail Sales data. Valeria Bednarik, a staffer at FXStreet, said that all or a mixture of the data cited above should turnaround the market sentiment in the short-term, especially if the figures beat the forecast.

The painful Journey Back

The markets are exhibiting mixed signals. On the one hand, economic performance figures inspire hope, while on the other, the ravaging effects of the currency pandemic wipe off any gains achieved.

According to Miles Ruttan, the chief economic strategist at Bytown Capital, the economic backdrop is currently deflationary in real terms and might remain so for an extended period. The government and central bank policy responses that the developed world is throwing at the pandemic have left real economies and households considerably squeezed, he added.

Governments' attempts to give the asset-owning class some cushion while increasing consumer price inflation makes it hard for the real economy to record robust recovery, Miles said.

The economist said the Australian situation is replicating the model explained above. According to him, the Land Down Under and other first world countries that have seen massive stimulus injection must now prepare for a bumpy ride.

He said the situation is bound to worsen when the Biden administration begins floating new fiscal ideas. Miles noted that since such policies will run alongside unrelenting deflationary forces in the real economy, the path to recovery for most of these countries will be harrowing.

Final Thoughts

On Friday, November 13, Victoria recorded the 14th straight day without a new coronavirus infection case, sending confidence that Australia has gotten the pandemic in control. However, the harsh effects of the strict lockdowns that brought the country to this milestone are only manifesting. Market experts think that it will worsen when the effects of the stimulus packages thrown into the economy kick in.

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