Insight

Looking ahead to 2022

26 May, 2021

If you can imagine the economy as a road, 2020 saw a major earthquake crack our foundations.  Looking ahead, 2021 will be a year to rebuild and gradually resume normal activity.

The COVID-19 pandemic

The COVID-19 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 that we will have to wait until 2022 for a sufficient proportion of Australians to be vaccinated and ’herd immunity’ reached. This means that, over the next two years, hotel quarantine failures and snap lockdowns will continue lurking as a potential risk.

The job market

Even the most optimistic economists would argue that the improvement in the jobs market has been pronounced and surprising. Government support with the JobKeeper initiative played an important role in stabilising business finances.

Also, Australia’s relative success in keeping the pandemic contained, compared to the damage wrought in many other developed economies, has meant we are well positioned for economic recovery.

Looking forward, we have a picture of strong and improving business confidence and gradually falling job vacancies, which suggests a strong demand for workers that will continue into 2022. To give context into this, the National Skills Commission tracks online job advertisements which are now above even 2011 highs, when the mining boom hiring peaked

Commission tracks online job advertisements which are now above even 2011 highs, when the mining boom hiring peaked.

However, jobs growth is not without its challenges. Our closed borders significantly impact the tourism and education sectors and, given current pandemic and vaccination trends, a return to normality is unlikely until 2022 at the earliest.

The property market

The property market has bounced back quicker than many expected. A key driver has been ample borrowing demand by households, with banks showing a willingness to increase their exposure to riskier loans. The absence of regulatory intervention to limit bank lending, plus the near-term trajectory of credit growth, which leads to price growth, suggests that property prices will continue climbing through 2021.

House price increases remain a regional phenomenon, particularly in Sydney and Melbourne. By contrast, apartment prices have lagged substantially in both cities, due to lack of immigration which has lowered demand for inner-city apartments.

The property market has bounced back quicker than many expected. A key driver has been ample borrowing demand by households, with banks showing a willingness to increase their exposure to riskier loans.

The Federal 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 will shift towards economic recovery.

Low interest rates and the RBA’s commitment to keep 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. These moves however, carry a risk of withdrawing support too early. It appears the Government is aware of this with its moves to offer more measured economic support at a smaller scale. For example, initiatives such as the extension of the HomeBuilder program, have helped to bolster the construction sector. While we have seen some support for the tourism and entertainment sector, this has been limited.

Australian dollar

At present, the path of least resistance suggests a higher Australian dollar. Global economic recovery from the COVID-19 lows suggests strong demand for commodities which boosts our export sector. Our superior handling of the pandemic also supports the relative attractiveness of Australian assets, another support for the Australian dollar.

Inflation

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. While the jobs market is improving, there is still substantial scope for improvement without triggering a surge in wage growth.

Under-employment is a key issue, which 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.

Australia’s relative success in keeping the pandemic contained, compared to the damage wrought in many other developed economies, has meant we are well positioned for economic recovery.

Economic growth

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 in the year ahead. Another important tailwind is the removal of inter-state border restrictions allowing domestic tourism and trade to recover.

Key risks that may emerge include the drag on population growth with international borders likely to remain closed in the near-term. Another is the possibility of further deterioration in our trading relationship with China. To-date, China has levied punitive measures including a de facto ban on Australian coal. China has not yet escalated its bans onto our most important export, iron ore, and we envisage an uneasy compromise regarding this during the rest of 2021.

On balance, the road ahead will be a year of further economic improvement and recovery. If you have any questions, please contact us.