It’s been about a year since I last wrote about Covid and how I saw it impacting the economy. It makes interesting reading to review the notes I wrote in March and April last year. The timeline and key actions played out broadly how I predicted. Governments worldwide pulled out all stops to keep the economy going, there were bouts of lockdowns and reopening, and the vaccine came along within a year or so. Despite the differing approaches in Australia between the states, as a nation we have done extremely well managing covid. We are now on the path to recovery.
So, what’s next?
USA
The USA looks to be well on the road to return to normality. They are getting close to having 50% of their population vaccinated (first dose) and given many in the community have already had the illness they are getting very close to 75% of the population having immunity. This is incredible especially when you consider how badly they handled the early stages of the pandemic. They are far closer to a full reopening than most other countries including Australia. This is very positive for the US economy and US stocks and will flow through to drive growth in the global economy too.
Australia
In Australia, the psychology behind the take up of the vaccine here in Australia has some really interesting cultural subtlety to it. Australians don’t like being told what to do and people appear wary of a vaccine that has been developed in record time. In the end, the majority of the population will get vaccinated here in Australia but it when they are ready and after a few people they know have had it. This might sound overly simplistic, but it is how people often think. Regardless, the economy is progressively reopening, and while we are lagging other western nations such as the US with our vaccination programs, I believe we will catch up quickly once we see other nations reopening their borders and international travel starting again without us.
Travel
Travel will be back, probably in the second half of this calendar year in the US and 2022 here in Australia. There is so much pent-up demand, just ask any mum and dad with a few kids. Disney recently reported that their resort bookings are back to 2019 levels. Corporate travel might be a little more subdued with the Zoom effect likely an ongoing trend for cost conscious business. But I’m broadly bullish that travel and the industries impacted by it will be reopening soon enough.
Inflation
Inflation will likely appear, but it will create volatility rather than a sharp correction in markets. The reason being that over the next 12 months the debate that has been between camps arguing “inflation vs no inflation” will change to “is inflation here to stay vs it’s a temporary jump”. So, there’s going to be volatility while the answer to that becomes clear. This transition period will be really important for markets because at the moment inflation and the rising interest rates that it will bring aren’t factored into asset prices around the world. The uncertainty around whether it’s a short term jump due to covid recovery and stimulus will save the market a more abrupt shock compared to inflation appearing due to long term issues.
Unemployment
Unemployment is remarkably low at 5.5%. Given this time last year we were looking at mass job losses, this is great news. However, in April even though the unemployment rate improved the number of jobs fell. Delving into the numbers reveals fewer jobs, fewer hours worked and thousands of people who stopped looking for work. This isn’t necessarily a problem, and I expect job numbers to return steadily in due course, but the unemployment rate isn’t as good as the headline figure appears. In a jobs market approaching theoretical full employment, you’d expect to see greater wages growth, and employees demanding higher pay. In this market, there seems to be a general sense that it's good to have a job rather than people asking for a pay rise.
The Banks
The Banks are well positioned for the recovery with interest rates at record lows for now and the worst of the pandemic over. They have more capital than required which will likely mean the introduction of capital management programs and their dividends are returning to their pre-pandemic levels. In a low yield environment, with dividends of say 7% including franking credits, with the prospect of capital returns, and some capital growth, the banks will become especially attractive to investors in the next 12 months.
Central Business Districts
Central business districts (CBD’s) around the country will return to their pre-pandemic glory sooner than people think. Many will tell you that working from home spells the end of the CBD, but I don’t think this is the case in reality. While working from home as a trend is here to stay, I think the empty space will refill soon enough. The company leasing 6 floors may only need 4 floors going forward but those 2 surplus floors will be sublet or relet to other businesses who can now access a CBD address for the same or less than they pay in say North Sydney. People want to be where the action and energy is.
Summary
I think the Australian economy is in a very strong position. The huge government spending programs have helped keep the economy ticking over. I do think the size of the budget deficits and the amount the country is borrowing is excessive, but that is a discussion for another day. But as we look ahead to the next 12-24 months, we are in a great position.
This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.