Economic Update – February 2021
by Infocus Author
Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.
A new dawn for the American economy
– January 6 riots in Washington DC highlight the magnitude of the political divide in the US
– Problems with vaccine roll-outs, shortages of supply and slower than forecast inoculation rates
– China’s economy undoubtedly strong, rest of the world coming good but slower than expected
We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your our team.
The Big Picture
Whenever a new President of the United States is sworn in, there is a natural period of reflection on the policies that were promised and a contrast with those that went before.
One expects even more introspection when there is a change in the governing party – as there was from Republican to Democratic on 20th January 2021. In addition, this inauguration focused attention on the end of possibly the most divisive presidency in recent history.
It would be easy to be dismissive of Trump’s term – as many Democrats have been – but, even in losing the election, Trump garnered around 48% of the popular vote. A lot of people liked him and his policies! The Sydney Morning Herald reported a statistic at the end of January that one third of Americans still thought Trump had won!
If we turn the clock back by about four and a half years – to the referendum on Britain’s membership of the EU – the two sides to that argument were also vociferous in putting their cases. The disbelief of the losing side rallied people to predict disarray and worse. Some even demanded a fresh referendum (and so on until they won, we suspect).
As it turns out, Brexit at the end of 2020 went quite smoothly with Britain getting most of what it wanted. The finance industry has not migrated to Europe as many predicted. It seems to be a fact of our times – either through education and/or the internet – people on both sides of most arguments are having their voices aired and magnified like never before.
President Biden had denounced Trump’s “Make America Great Again” slogan. Trump wanted to take on each nation separately in an attempt to get good deals for the US. Biden wants to go back to multilateral agreements. On day one, Biden signed executive orders to go back into the World Health Organisation (WHO) and the Paris Climate Accord.
As with many policies, there is no universally best outcome but one which suits the current mood and opinions of the people it represents. The riots in Washington, DC on January 6th 2021 made it clear that not everyone is happy with the new future under Biden. Trump was impeached in the House of Representatives for his role in those riots and Biden must handle the ‘trial’ in the Senate along with all of his other pressing issues.
Thankfully, there has not been any recurrence of the violence from when the Capitol building was over-run. Biden has a big job on his hands to make both sides see reason. The solution seems a bit like holding a big dumbbell above one’s head but grasping the bar only in the middle. Every slight movement can generate a big, potentially dangerous sway from one side to the other.
It is also important at this time to reflect on the new sizes of the majorities in both houses of Congress. Democrats have only a slim majority in the House of Representatives – but all Democrats are not ‘equal’ and neither are all Republicans. Deal-making will still have to be done within and across parties at a frenetic pace for Biden to get close to what he wants, particularly in his first 100 days.
The balance of power in the Senate is even more precarious. The Vice President, Kamala Harris, has the casting vote but the Senate works largely on a committee structure. Will each committee have to have a 50:50 balance? And then there is the filibuster rule that doesn’t seem to be going away. That rule requires a 60:40 majority vote to avoid them. In other words, bipartisan bills will still need to be crafted.
Nevertheless, Biden has moved swiftly to sign many executive orders. These orders require no vote but the bigger bills need to go to Congress. Biden has already ended building of ‘the wall’ and mandated the wearing of masks on Federal premises and certain air travel. He has provided some relief to those whose jobs were affected by the pandemic.
On another contentious issue, Biden has shut-down work on the Keystone XL oil pipeline from Alberta, Canada to a US pipeline 1,200 miles south. There are obviously economic consequences for the shut-down. The upside is the reduction in the environmental and indigenous population concerns. Most things come at a price.
When we turn to the bills which must be voted on in Congress, perhaps the most important, immediate issue is the $1.9 trn proposed coronavirus relief package. Much has been made of the wish to add $1,400 to the $600 cash payments to individuals that has already just been passed in the $900 billion relief package passed in December.
Some ‘progressives’ want this $2,000 payment to lower income earning individuals to become a recurrent benefit. Others will no doubt want to scale it back, even within the Democratic party. A CNBC TV guest estimated that the package might be scaled back to about $1 trn before it can be passed.
Naturally the new administration has already claimed that the coronavirus situation is a lot worse than they had expected. It is not clear to what problems they are referring that were not in the news in recent weeks. But doesn’t every new government everywhere try to heap as much responsibility as possible on the previous government?
Biden stated, “It’s going to get worse before it gets better”. US COVID deaths are expected to reach 500,000 in February and he said, “deaths are expected to exceed 600,000 before we start to turn the corner”.
There have been important disruptions to the supply and distribution of vaccines in the US. Biden has stated they plan to oversee 100 million vaccinations in his first 100 days. Since two doses are required for each person (although the Financial Times reports some early results from Israel suggesting that the Pfizer vaccine is 90% effective with only one dose), that means only 50 million of the 323 million Americans can be expected to be vaccinated by the end of April – at best. Apparently, herd immunity can be achieved with around 70% to 80% of the community so vaccinated. That still leaves a long way to go but it’s a great start.
There are many unknowns in these vaccine roll-outs. Does the vaccine work as well with the new strains of the virus? Moderna has stated their vaccine is much less effective with some new strains but that they are developing a new ‘booster’ vaccine. Germany is reported to not giving the AstraZeneca vaccine to over 65s because it does not work well enough – but the EU approved it anyway!
Provisional results for Novavax suggest it is 89% effective against the original strain and 85% effective against the UK variant. It is reported to be much less effective against the South Africa variant.
Can immunised people still pass on the virus? For how long does immunisation last? None of these issues, and more, should stop us supporting the initiatives. What we wonder is when will the US and global economy be relatively safe from the effects of the virus?
Much of US economic activity depends on international travel and trade. Unless all other relevant nations’ populations are largely vaccinated, normality cannot return in full. The latest growth figures for the US shows that the stellar result for quarter 3 (Q3) has pulled back to 1% for the Q4 quarter – not bad in itself but GDP for 2020 is still 3.5% below 2019’s figure.
Both the US and Europe are very much engaged in tackling the virus. Poorer countries are at the back of the queue in being allocated sufficient vaccines to produce herd immunity. Even Australia – certainly not a poor country – is facing supply constraints. And now, the EU is placing export restrictions on exports if home demand is not supplied.
Our government pre-ordered some Pfizer and a lot of AstraZeneca, but no Moderna vaccine. It turns out the AstraZeneca vaccine is insufficiently effective to produce herd immunity and we cannot access any more of the Pfizer or Moderna drugs this year – at least.
Our government’s plan is to use the AstraZeneca vaccine, manufactured by CSL in Melbourne, as a stop-gap until better vaccines become available next year. New vaccines are expected from the US, India, China and Russia. We are not yet aware of their final trial results or their availability.
We surmise that the end is potentially in sight as, according to Johns Hopkins university COVID-19 tracking, the reported daily infection rate has been falling for the last month. But we still have a long way to go and there may be fresh outbreaks and shutdowns along the way. We feel that stock markets have priced in a best-case scenario so we would not be surprised to see more market volatility until it is clear that we are indeed defeating the virus and the world can focus beyond it.
Meanwhile the Chinese economy is going from strength to strength. China surprised on the upside with its economic growth figure of 6.5% in quarter 4, 2020 compared to its 6.3% expectation. Its industrial output and fixed asset investment both beat expectations but retail sales missed at 4.6% compared to an expected 5.5%. Exports grew a stellar 18.1% against an expected 15.1%.
China slapped sanctions on 28 people from the Trump administration. Its air force has also recently conducted 20 flights in Taiwan airspace over one weekend in what has been described in some media outlets as a direct challenge to Biden. It is yet to be seen if Biden can smooth things out but there has been no sign yet of him intending to repeal the massive Trump initiated tariffs placed on Chinese imports to the US. If they were as bad as many suggested, why not repeal Trump’s executive orders?
At home, there are still many unresolved issues in the China-Australia trade war. China has held up, or imposed significant tariffs on, a variety of imports from Australia such as coal, wine, barley, copper and timber. It is not clear what China’s end-game is but iron ore prices increased rapidly through 2020 and there seems no end in sight for China’s demand of that ore. Is China trying to craft a strategy to impact iron ore prices?
Our labour market data continued to improve but the consequences of changes in COVID-affected immigration pressures may not have yet fully worked themselves into our economy.
We feel that it is time to set an investment strategy that is looking through to 2022 and beyond – and be prepared to ride out any short-term volatility in the early part of this year.
We see Biden as being too tied up with impeachment proceedings, senate committee structures, coronavirus issues and healing the rift between the two extremes of the political divide in his first 100 days to even think about tax and other policies. He campaigned on raising taxes (income, corporate and capital gains) and no doubt he will eventually make some moves in that direction. In spite of all of the fiscal stimulus packages, he will have to move slowly so as not to rock the boat too much.
We also see Australia continuing to pursue stimulus top-ups as needed. So, as far as we are concerned, there is likely to be a big push of stimulus-induced growth here and in the US. As a result of fiscal stimulus and the Federal Reserve’s quantitative easing programme, we see continued weakness in the US dollar. Providing commodity prices hold, it is possible that the Australian dollar against the US dollar will strengthen. But, again, we emphasise possible stumbles in markets if the re-opening of economies is adversely affected by new COVID outbreaks.