With Australia officially making its way out of the recession in the September 2020 quarter, the RBA expects Australia’s gross domestic product (GDP) to return to its end-2019 level by the middle of this year, and grow by 3.5 per cent over both 2021 and 2022.
While more positive outcomes around the COVID-19 vaccine and its rollout could lead to stronger growth than is currently expected, Lowe added that, conversely, disappointing news on this front would delay the economic recovery.
“An important near-term issue is how households and businesses adjust to the tapering of some of the COVID support measures and to what extent they will use their stronger balance sheets to support spending,” he said.
According to Lowe, the RBA remains committed to maintaining “highly supportive monetary conditions” until its goals are achieved.
Our investment team will also be keeping an eye on the Australian dollar, which recovered from a low of 57.4 US cents in March 2020 to end the year sitting around 75-76 US cents.
Though it may sound counterintuitive, particularly as we’re used to keeping an eye out for a good exchange rate forn an overseas holiday, a weaker Australian dollar can help stimulate the local economy. A weaker Australian dollar means that the goods and services that Australia sells offshore are cheaper, and demand for these may increase as a result.
So, what drives the Australian dollar? According to Chris, there are a few things to look out for.
“Interest rate differentials are very important. If there’s a material difference between real interest rates in Australia and the US, for example, the currency that has the higher real interest rate is therefore more attractive, leading to more investment in that currency,” Chris explained.
The Australian dollar can also be seen as a proxy for China, Chris added.
“If China’s growth is strong and they’re building infrastructure and importing a lot of goods, then the chances are they’re buying a lot of goods from Australia, like iron ore for steel production for example. In turn, the Australian economy benefits,” he explained.
“Because of that link between Australia and China, investors may look at China’s growth and expect related growth in Australia, leading to investment in the Australian dollar.”