Will there be an economic boom in 2021?

Stephen Koukoulas
·4-min read
Cute piggy bank wearing sunglass on the beach.
Will there be an economic boom in 2021? Source: Gettu

Economic history is dominated by events and trends that no one anticipated. They are often called black swans – things thought impossible that are in fact real.

Booms and busts in the economy, stock market surges and crashes, interest rates at 17 per cent or zero per cent. As they say, who’d have thunk it?

And so it was in 2020 when the Covid-19 pandemic came from nowhere to drive the world and Australian economy into its deepest slump since the 1930s Great Depression. Unemployment jumped, wages growth and inflation crashed and policy makers responded by cutting interest rates to near zero, quantitative easing was implemented, wages were subsidised and a massive fiscal stimulus helped to some extent to support the economy.

As 2020 draws to a close, there is growing evidence that the COVID-19 health crisis has been contained in Australia which has sparked a surge in confidence and investor activity.

State and Territory borders are opening, restrictions within borders are being relaxed and it is increasingly likely that in coming months, life for most Australians will be roughly back to where it was prior to Covid-19.

Only issues associated with international borders – tourism and foreign students figure large here – will remain problematic.

Where are we ending 2020

The economic data and markets news remains choppy, erratic and often hard to interpret. Despite this, enough of these indicators are pointing in the same direction – up.

We just might be starting on a path to what would be an unexpected surge in the economy.

We do know the stock market is rising nicely and is now just 8 per cent from a record high. The ASX200 is up over 50 per cent from the low registered in March and companies are reporting better news.

House prices are also starting to march higher despite a negative hit to underlying demand from the collapse in net immigration into Australia. Low interest rates and favourable affordability have underpinned a surge in buyer demand, especially among first home buyers.

According to CoreLogic, capital city house prices have risen in line with rising auction clearance rates. The strongest markets are in Perth, Adelaide, Darwin and Brisbane, but even Sydney and Melbourne house prices look to be rising again.

This mix of rising share and house prices reflects a high degree of confidence in the economy on the one hand, but also will have a positive effect on household wealth which was hit in the first half of 2020 when these markets were materially weaker.

If, as seems distinctly possible if not probable, share and house prices keep moving higher in 2021, the confidence and wealth effects will morph over to the real economy and with that spark what now would be a surprising lift in economic activity.

Both business and consumer sentiment are materially stronger, which are important preconditions for a broader economic pick up. While some of the lift is no doubt due to relief – the lock downs are ending – some of the components of the surveys of businesses and consumers point to a structural recovery.

The data on employment, job vacancies, international trade, enterprise agreements for wages, for example, are all materially better than just a few months ago. Sure, there are from a low base but the trend is undeniable.

If these are the start of a new trend and not just a blip or series of one-off signs of better news, the current consensus for the economy in 2021 will prove to be too pessimistic.

It would mean that by this time next year, annual GDP growth will be nearer 6 per cent with the unemployment rate below 6 per cent. It would mean wages growth and inflation would be a little higher, albeit from record low levels in 2020.

It would also mean the RBA’s guidance that interest rates remaining near zero for at least the next 3 years will need to be revised and the budget deficit will narrow appreciably from the record $214 billion estimated for 2020-21.

A strong recovery seemed unlikely even a few months ago. Such was the uncertainty and general gloom surrounding the economic effects from the Covid-19 health crisis.

But with the success in containing the health concerns and the resulting opening up of the economy, expect to see a rush from economists to revise their forecasts for 2021 higher.

As the famous saying on economic analysis and forecasting goes, ‘when the facts change, I change my mind’.

A few months ago, the outlook was gloomy for the Australian economy.

With a run of new facts showing surprisingly better news, the outlook for 2021 all of a sudden got materially better.

Let’s hope it is locked in.

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