The Reserve Bank of Australia (RBA) has indicated the Australian recession could be over and this may be good news for ASX shares and the S&P/ASX 200 Index (ASX: XJO).
Why is the RBA saying the recession is over?
Although third quarter data isn’t available yet, RBA Deputy Governor, Guy Debelle, believes that the technical recession may be over. A recession occurs when there are two consecutive periods of negative GDP growth, which we saw in the first and second quarters this year.
However, the coronavirus pandemic and subsequent response has made this recession different to many others. Instead of a steady activity decline, we saw a sharp drop due to lockdowns and border closures in March. That coincided with the March bear market which saw ASX shares plummet lower.
The June quarter saw many states across Australia enter lockdown which reduced economic output, while just Victoria remained locked down in the September quarter. That means there is a good chance that GDP growth will be positive in next Friday’s data.
What does this mean for ASX shares?
In my opinion, the short answer is, not much. While we may be out of a technical recession, the economy is still on life support and heavily reliant on government stimulus measures.
However, that doesn’t mean upcoming RBA announcements won’t impact on valuations. The RBA is set to meet next Tuesday to discuss monetary policy while next Friday’s data could be key.
Forecasts showing strong expected growth could boost market sentiment and send ASX shares climbing. However, a hawkish outlook may create further investor uncertainty and add to current volatility.
It would be a remarkable turnaround to exit the recession after only two quarters. However, investors know that there is likely more pain on the way in 2021 and I don’t expect ASX shares to surge higher on the latest news.
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Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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