2021 will be a year of recovery. A successful vaccine rollout, particularly in closely linked trading partners of Australia, will dramatically reduce the transmission of COVID-19. In turn, this will allow a return to normal operation for businesses, governments and society in general. The outcome will be a stronger rebound in economic activity, driven by private consumption and underpinned by necessary Government spending.
We view the pandemic as both a temporary impact and a transformative force, that will result in a sustained, long-term increase in fiscal spending. The aim of policy makers will be to rebuild economies and return growth rates, inflation and bond yields back to ‘normal’ levels. This will see a significant increase in government debt (Federal, State and Municipal) throughout the decade, and hopefully robust economic growth. Whilst this journey should be positive for market risk in 2021, we are somewhat more sanguine from 2022 onwards. There are forces at-hand which make the return to robust, or even just normal economic growth rates a challenge.
As we enter 2021, consumer finances appear to be in a good position with the savings rate in most developed economies elevated compared to pre-COVID levels. This is likely due to a combination of income support from Governments, reduced discretionary spending during lockdowns (i.e. no international travel) and a historically low mortgage finance burden. The low mortgage rates (globally) combined with supporting changes to lending standards (domestically) will underpin house prices and housing construction activity in 2021.
There are headwinds which we fully account for in our balance of risk assessment. These risks are in the form of China trade conflict (and geopolitical conflict), slower recovery in employment and ‘soggy’ wages growth, weak demand, currency appreciation through 2021 and elevated equity valuations which will start to need earnings validation. However, on the collective balance of risks, we expect to see support for further asset price inflation and some (albeit modest) steepening of the yield curve. This leads to a positive view on equities, particularly cyclical companies, and commercial property, whilst we are more cautious on bonds. The economy in 2021 should deliver earnings growth to businesses.