As another year draws to a close in a blink of an eye, we say goodbye to an unforgettable (or perhaps forgettable) twelve months headlined by the coronavirus pandemic.
There is nobody whose life has not been touched by this event. Many of the effects will be long-lasting, such as the way we work, interact, travel and shop.
We shall now look ahead to 2021 with hope, but also with a certain degree of caution.
The economists at the Commonwealth Bank of Australia (ASX: CBA) have compiled a list of big issues which they believe will dominate the headlines and affect investors in 2021. We’ve summarised the main points below.
COVID-19 (yes, still…)
The economists believe that COVID-19 will still dominate the landscape in 2021, and global economic outlook will be dictated by the virus and how quickly an effective vaccine can be distributed.
Australia has done well in managing the virus spread in the country, with just over 28,000 cases at the time of writing, while keeping the death rate at under 1,000. The country sits a lowly 94th in active cases globally.
The Commonwealth Bank economists also expect the global economy to contract around 3.5% by the end of 2020, before rebounding 5% in 2021.
This is good news considering that the economic downturn is the worst since World War II – or in peacetime, the worst downturn since the Great Depression of the 1920s/30s.
The Joe Biden presidency
The recent $1 trillion stimulus package approved by Congress could boost economic growth in the United States and return the American economy to pre-pandemic levels by the end of 2021, the economists predicted.
As President, Joe Biden could introduce tougher financial regulation and impose anti-trust measures on big technology companies.
The US administration’s engagement with China on trade issues will also be one to focus on, as this would also affect businesses and investors around the globe including Australia.
The economists believe that Biden will adopt a tough but conciliatory stance with China, rather than a ‘tit-for-tat’ tariff battle pushed by Trump.
Any discussion about the Australian economy has to include China.
China is by far Australia’s biggest trade partner, accounting for almost 40% of Australia’s goods exports, and 28% of Australia’s imports. Until recently China was also our largest source of tourists.
The current political spat with Beijing and the subsequent bans imposed on Australian produce will certainly be a key talking point in 2021.
The economists are tipping growth of 1.8% for China, accelerating to 9.1% in 2021 before lifting by 5.6% in 2022 – which is a big positive for the world and Australia.
Interest rates in Australia are set to remain super low for some time. In fact the Reserve Bank of Australia has made a commitment to not lift the cash rate for at least three years.
On its projections, the economists predicted that inflation will struggle to get near the bottom of the 2–3% target band.
In other developed nations, interest rates have been reduced even further, with negative rates in some parts of Europe and in Japan. The economists believe that it will stay that way for some time.
The economists believe that the ‘shotgun’ approach of the Australian government with initiatives such as Jobkeeper and industry subsidies have made a difference in keeping the lid on unemployment.
At the start of the crisis, the Reserve Bank and Federal Treasury expected the jobless rate to peak over 10%. Now the expectation is that the jobless rate could peak at 8% or below in 2021.
The effective distribution of a vaccine would be the main catalyst for a faster-than-expected economic recovery. And that raises the prospect of the jobless rate returning to 5% quicker than expected.
Australia has relied on population growth to fuel economic growth for decades. Population growth of around 1.5% a year and productivity growth of 1.0-1.5% has underpinned our economic growth of 2.5-3.0%.
That’s all changed as a result of the pandemic.
In the 44 years of records, there has never been three months in a row where more people left Australia than settled here.
Migration will certainly be a topic of debate in 2021 in the struggle to maintain our economic growth and prosperity.
The World Bank has projected that by 2021, an additional 110–150 million people worldwide will have fallen into extreme poverty in the developing world as a result of the pandemic.
While advanced economies have rolled-out large-scale government spending programs to protect their citizens from the recession, emerging economies aren’t so fortunate.
Those countries have weaker healthcare systems, wage and welfare safety nets, and lack of macroeconomic policy tools at their disposal.
Government action on climate change has stalled over the past year, as focus turned to handling the pandemic.
A lack of resolve from the Trump Administration in the US also accounts for some stalling in moves to address climate change.
However, the economists predicted that President-elect Joe Biden will take a much more active approach on climate change.
Closer to home, Australian Prime Minister Scott Morrison was less committed, saying that “Australia also shares an ambition for net zero emissions, but we are focused on how to get there.”
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