Looking Ahead to 2022
If you can imagine the economy as a road, 2020 saw a major earthquake emerge with the
Coronavirus pandemic and the lockdown restrictions to halt its spread. Government and RBA
support helped divert traffic around this major obstacle. 2021 will be a year of bouncing back
and looking forward to the economy recovery, with rebuilding and gradual resumption of
normal activity. However, it is safe to say, that the world in many ways has now changed.
Coronavirus pandemic and solutions on offer
The Coronavirus pandemic remains a concern with cases and fatalities in new waves particularly in India, Brazil and, to a lesser extent, continental Europe. We have seen a response in the creation of new vaccines at an unprecedented speed. It is likely we will have to wait until 2022 for a sufficient proportion of Australians to be vaccinated and “herd immunity” reached. This means that
hotel quarantine failures and snap lockdowns will continue as a potential risk over the next two years.
The improvement in the jobs market has been pronounced and surprised even the more optimistic economists. Government support in JobKeeper played an important role in stabilising business finance, as did Australia’s relative success in keeping the pandemic contained last year.
Looking forward, we have a picture of strong and improving business confidence and rising job vacancies. These should continue to drive jobs growth over the next year.
The property market has bounced back quicker than many expected. A key driver has been ample demand for borrowing by households with banks showing a willingness to supply, even increasing their exposure to riskier loans. Absent regulatory intervention to limit bank lending (as happened over 2017-19) and the near-term trajectory of credit growth (which leads price growth) suggests that property prices will continue climbing over 2021.
The Budget and Government debt
2021 will be a year of consolidation for the Government. The big-ticket spending items such as JobKeeper have now concluded and their focus shifted towards the economic recovery and reducing the extent of their economic intervention.
Low interest rates, and the RBA’s commitment to keeping them low until at least 2024, will support the Government in refinancing its debt and locking in lower rates. It will also help with its longer-term ambitions of gradually reducing its debt position over time. However, the Federal Budget for FY22 highlighted that the Government is not rushing to this position. Treasurer Frydenberg committed to further spending with a number of social goals, notably aged care and child care, ahead of a Federal Election (this must be called by May 2022). Initiatives to counter the damage of the pandemic remain a feature of Government policy with the HomeBuilder program helping support the construction sector. While we have seen some support for the tourism and entertainment sector this has been more limited. We may also see, given the risk of new outbreaks, a need for further Government support given JobKeeper is no longer in place as a fallback option in the worst-case scenario of prolonged lockdowns.
The inflation outlook remains subdued. A strong Australian dollar acts to reduce inflation from imported goods and services, whilst making it harder for our foreign trade partners to purchase Australian goods and services. Meanwhile, the strength in the property market does not translate directly into higher consumer inflation (CPI). While the jobs market is improving there is still substantial scope for improvement without triggering a surge in wage growth. Underemployment is a key issue. This suggests that while there might be some pick up in inflation from the lows that we saw due to the 2020 lockdowns, it is unlikely to be extreme or sustained.
Households have built up substantial savings over 2020 thanks in part to Government stimulus efforts. Given strong consumer confidence this should see some improvement in private sector spending to drive the economy this year. The removal of Inter-State border restrictions allowing domestic tourism and trade to recover is another important tailwind.
On balance, 2021 will be a year of further improvement and recovery. If you have any further questions, please speak to your Financial Adviser.
Source: IOOF Research