2021 and the road to economic recovery… where to from here?

From an economic viewpoint, 2020 was a total write-off.

More than 90 per cent of the world’s economies were plunged into recession because of the COVID-19 pandemic. Australia was no different, recording its deepest economic slump in modern history.

The Reserve Bank of Australia has suggested that official interest rates may not rise for three years.
The Reserve Bank of Australia has suggested that official interest rates may not rise for three years.Credit:Louie Douvis

The good news is the outlook for 2021 is much better and there is even cause for cautious optimism.

It is easy to see why; however bumpy the road was to get here, as governments learnt “on the job” how to tackle the public health crisis caused by a pandemic, we are in an enviable position.

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COVID-19 case numbers across Australia are low and restrictions have been wound back. We also have the luxury of time to observe how vaccines are rolled out in the northern hemisphere.

Compare this to other developed economies, such as the US, UK and Europe, that are facing large outbreaks, increased restrictions and are being forced to rush the deployment of vaccines.

The Australian economy enters 2021 in much better shape than most others – and healthier than the Reserve Bank of Australia, the government or most economists initially forecast.

Importantly, it seems that the unemployment rate will peak below official forecasts.

We expect some of this momentum to continue as both consumer and business sentiment closed 2020 at long-time highs and retail conditions remained strong.

Somewhat curiously for a deep recession, the level of retail spending remains above what it was entering the crisis. The reason is generous government income support for households. Some of this largesse has been saved and should be a tailwind to spending in 2021 as support tapers off.

The RBA’s contribution is more entrenched – particularly low-interest rates. The central bank has suggested that rates may not rise for three years, although it may wind back this commitment should the economic recovery continue unabated.

With interest rates low, the property market will likely gather momentum and it would be unsurprising to see prices rise. This should help support a recovery in residential construction that still faces the material headwind of low population growth.

The prospect of international borders re-opening remains uncertain and this will weigh on sectors that rely on population flows, international tourists and students.

Another uncertainty is business investment, where the medium-term outlook is unclear.

While the economy is sure to recover, the nature of the healing can be improved.

We entered the crisis over-reliant on an expanding population for increased economic activity and struggling to generate productivity growth.

We need governments to do better on reforms to re-invigorate business investment as a source of growth and, in turn, have it generate better wages growth.

While we need to support businesses heavily impacted by the crisis, having the economy underpinned by extreme fiscal and monetary stimulus is neither desirable nor sustainable. And it is only confidence in the outlook that will encourage business to invest in the future.

Australia’s trade tensions with China also pose an ongoing economic risk and need to be resolved. To date, agricultural produce, wine, seafood and coal have all attracted Chinese trade barriers.

Should restrictions be placed on iron ore, the flow of overseas students or tourists, this would have an additional negative impact on the economy. On the former, we are currently riding high, with iron ore prices at a near-decade high of US$170 a tonne.

The global trade tensions need to be are resolved quickly. The United States, with a more conventional approach from a new president, would likely exert pressure on China to observe a more normalised trade stance. However, it is still likely to require a multilateral approach in which Australia would need to play a greater role for the situation to improve.

There remains a lot of work to be done by policymakers if we want to create a better economy. As 2020 clearly demonstrated, we need to actively build a sustainable, productive and resilient economy to help weather any future economic setbacks – whatever they may be.

Alex Joiner is the chief economist at IFM Investors

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Source: Thanks smh.com