What can Australians expect in 2021?

This topic discussed Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP in his recent Insight.

Dr Oliver explained we’re by no means out of the woods, economically or epidemiologically speaking, but there’s certainly a number of optimistic indicators on our prospects heading into 2021.

Here’s the balance of his article….

Extremely positive results from trials of three of the leading vaccine candidates, as well as the news that immunity may be longer-lasting than first thought, are good reasons for optimism, and these developments have come on top of the most recent Westpac/Melbourne Institute survey which showed consumer sentiment already at its highest level since late 2013.

Consumers appear to be particularly encouraged by the strength of the housing market, which in turn is being driven by the Reserve Bank’s commitment to hold interest rates at record lows for longer than had previously been dictated by policy.

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This effect seems to be overriding the other questions hanging over the housing market, such as the prospect of sustained high unemployment and lower immigration.

The survey shows that consumers are increasingly bullish about prospects for the broader economy over the next twelve months, and that this confidence is spilling over into a propensity to spend on major household items – good news for retailers this Christmas.

Opinions on the future state of the labour market, however, were decidedly more pessimistic.

According to NAB’s monthly business survey, business confidence has also rebounded strongly to its highest level since mid-2019.

This comes on the back of re-openings in Victoria, where confidence surged in October, although remaining lower overall there than in the rest of the country.

Gains were shared across most industries, apart from mining (which has of late been operating in a vastly stronger climate to the rest of the economy) and transport, where obvious difficulties will persist as long as movement continues to be restricted.

The caveat here comes in the same survey’s assessment of business conditions for employment, which declined by 5%.

This is a consistent theme at the moment, and a soft labour market looks as if it could potentially be an Achilles’ heel in the prospects for a full recovery.

That said, I am not too worried about this as the labour market has already seen a stronger-than-expected recovery and if spending picks up, it will continue to improve albeit at a slower rate than has so far been the case.

Both of these surveys capture a slice of Victoria’s recovery, to various degrees, but none of the effects of developments on the vaccine front, so it’s likely that confidence will continue to improve into the new year, especially if the country continues to record low numbers of new infections.

The impact of ongoing government support and particularly tax cuts, and monetary easing should also not be underestimated, giving businesses confidence to retain staff and ultimately hire more, as well as giving consumers the confidence to run down the huge June quarter spike in saving.

Guest Author: Dr Shane Oliver is Head of Investment Strategy and Chief Economist at AMP Capital. You can read the original article here.

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