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Australia’s economic rebound

Australia’s economic rebound

 

Australia, much like most developed market economies around the globe, has fared much better during the pandemic than many would have expected. While it’s hard to understand all the contributing factors, it’s certainly true that a combination of government intervention (including measures aimed at limiting the spread of the virus as well as financial incentives), plus perseverance from the private sector played a huge part. In this article we look at the major developments since the onset of the pandemic and share our view of what we can expect in the future.

Batten down the hatches

The potential for a pandemic has been an ever-present risk to the global economy and share markets, but despite this the volatility we witnessed during March 2020 demonstrated just how little investors knew about Covid-19’s potential impact. For example, the Australian share market continued to rise over the first couple of months of 2020, even while Covid-19 concerns grew, peaking in mid-February before falling sharply over the next six weeks. During this time, the S&P/ASX 200 dropped by 36%. But what was more surprising was the reversal, where the market rose by approximately 27% to the end of May 2020. Twelve months on and Australian shares are another 28% stronger, and in fact, even higher than they were at the pre-crisis peak (see chart  S&P/ASX 200 Index).

S&P/ASX 200 Index

Source: Bloomberg Finance L.P, EISS Super

Governments respond to the pandemic

The sharp fall in share markets followed by the quick recovery was caused by a combination of uncertainty one would expect from a global pandemic, but also from government responses around the globe, which were larger and more quickly implemented than expected.

In Australia, for example, the introduction of the JobKeeper (and expanded JobSeeker) programs were costly but also very successful, stopping the unemployment rate from rising above 10%. Although unemployment did rise to 7.5%, it pales in comparison to the 11% we saw in the early 1990s (the “recession we had to have”). Unemployment has since dropped to levels consistent with the pre-pandemic period (see chart Australian Unemployment Rate).

 

Australian unemployment rate

Source: Bloomberg Finance L.P, EISS Super

Australia’s first recession in three decades

One of the main consequences of the pandemic was that Australia experienced its first recession since the mid-1990s. The economy contracted by more than 7% in mid-2020, with most of the knock-on effects experienced in the June quarter. But what’s interesting is that the duration of the recession was only two quarters, and there was strong economic growth coming out of the period.

Since this time, the economy has grown, and Australia’s overall productivity is higher than it was going into the pandemic. Government financial support has played a big role in this growth, but importantly it was reduced fairly quickly, limiting the size of the deficit and the cost to the taxpayer.

The RBA reduces the cash rate to an all-time low

Like the economic incentives announced by the federal and state governments, the Reserve Bank of Australia’s (RBA) decision to reduce the cash rate to a new low of 0.1% helped Australians to continue borrowing, which in turn kept the economy ticking over.

The RBA also cut borrowing rates, which put increased upward pressure on house prices. The growth in home prices so soon after the onset of the pandemic is yet another phenomenon which very few investors would have foreseen twelve months ago. Likewise, commodity prices have risen dramatically over the last twelve months. This is in contrast to what was expected to occur in an environment where both the manufacturing and services sectors of the global economy have been dramatically impacted. In fact, demand for our commodities has provided significant support to the economy and the Australian share market.

A hopeful outlook for Australia

Although Australia is lagging behind other key economies including the United States, the United Kingdom and Europe on the vaccine front, the rollout is gaining momentum with 7,645,585 total vaccine doses administered (as at 29 June 2021). 

The recent lockdowns across most states have dampened but not derailed the recovery. Although there’s no obvious solution to avoiding further lockdowns short of achieving a very high vaccination rate, the new Delta Covid-19 strain may spur more Australians to get their vaccinations sooner rather than later.

Travel bubbles, such as that with New Zealand and the proposed one with Singapore, gives us another opportunity to help the economy recover faster. These bubbles may be fragile, but hopefully continuation of the vaccination program will help to maintain passenger movements to and from the country.

While we’re encouraged by Australia’s economic performance and its prospects for the future, we’re also conscious that share markets are forward looking, and have most likely taken into account our good performance and strong economic position.

With interest rates at historical lows, Australian companies will need to come through with strong business performance to justify current share prices. This does not mean we’re pessimistic, in fact quite the opposite. But we caution members that the next twelve months will not look similar to the last twelve months, where we saw exceptionally strong share market growth and returns for super funds.

We’re here for you

To discuss any aspects of this article or to develop an investment strategy that’s right for you, contact one of our EISS Super financial planners on 1300 369 901 (select option 2), or visit eisuper.com.au/appointment to request an appointment. We may be in lock-down at the moment with many of the team unable to travel to regional areas but we’re still here and our financial planners can meet with you by video conference or phone.