Central banks in the US, Australia and most other countries have done about all they can to help their flagging economies from grinding to a halt. Since the ‘recession’ was wilfully created by public health measures to stop the spread of the virus, it was left to governments (as is their role in such situations) to expand fiscal policy for more economic stimulus.
The US government launched a massive aid programme earlier in the year but it dragged its feet in keeping that initiative going. Eventually, Trump signed a bill for around $900bn of coronavirus aid just after Christmas. The Democrat-led lower house then sought to increase one-off payments in the bill from $600 to $2,000. So far, the Senate has rejected that plan, despite support from President Trump.
The Australian government was far more proactive in providing aid. Various programs such as JobKeeper and JobSeeker have helped those in most financial need. However, these programs are being scaled back as the economy recovers.
We start 2021 with central banks left with little wiggle room on interest rate settings but governments remain willing to create a mountain of debt to prevent economic disaster. Australia is now looking at a one trillion-dollar government debt in 2021.
With interest rates near zero, the debt is less of an issue but steps must be taken to address the problem as soon as the economy improves.
There were major movements in commodity prices over 2020. The price of iron ore was up about 75%; oil prices were down around 20% to 25%; the prices of copper and gold were each up around 25%.
The Australian dollar (against the US dollar) started the year at 70 cents, plummeted to 56 cents in March and finished the year having gone above 77 cents.
It should be stressed that some of the recent apparent strength in our dollar has been due to the weakness in the US dollar rather than an inherent strength in Australia. If China continues to intensify its trade war with us, our dollar could start to retreat.
Volatility on Wall Street, as measured by the VIX ‘fear’ index, started the year at an average level of 14 but climbed to 82 at the worst of the pandemic crisis. It finished the year moderately above average at 23.
Australia was unable to avoid a recession using the simplistic definition of two consecutive quarters of negative economic growth. This policy-induced recession was the price of maintaining public health standards. The economy bounced back sharply in Q3 with a growth of 3.3% in just one quarter but that left GDP still 4% below where it was in the last quarter of 2019.
Unemployment was unexpectedly quite resilient in 2020. It was 5.1% in December 2019 and rose to a peak of 7.5% in July and finished the year at 6.8%. The RBA had predicted the unemployment rate would finish 2020 at 9.3%. It, like many other agencies, admitted that, in hindsight, they were far too pessimistic at the height of the pandemic fallout in March. Of course, the cap on the unemployment rate must at least in part be due to the government’s action with jobs programs.
It is too early to tell how big any ‘new waves’ of virus outbreaks will be – following Christmas and New Year celebrations. The federal health minister has predicted 80% of Australians can be vaccinated by October 2021 – with health workers and aged care residents being at the head of the queue.
We think it is quite possible we will see modest or negative economic growth in 2020 Q4 and/or 2021 Q1. But, providing the government keeps doing what it has been doing, the impact on the population will be largely contained. However, the fly in the ointment is China.
For at least two months, China has been refusing imports of various Australian exports: coal, lobsters, wine, barley, timber, etc. Although some vague environmental reasons have been given, these actions are widely interpreted as payback for Australia’s stance against China on its handling of the coronavirus and our close ties with the US.
If the China-Australia trade spat is not resolved – or, indeed, if it escalates – the chance of negative economic growth in Australia increases.
It is for the reasons of possible fresh lockdowns and trade wars that we are pencilling in a possible temporary downturn in the ASX 200 in the first half of 2021 despite our positive forecasts for the longer term. We think it is too hard to try and trade through any market volatility. If one’s investment strategy was appropriate for the longer term before any major volatility begins then riding the waves is the prudent way to go if one believes the long-run is indeed solid.
China was first into the pandemic and arguably the first out. Because of its style of government, it was better able to control lockdowns and fiscal stimulus. In recent months its economic data were consistently strong.
China weathered the trade war with the US. Big tariffs are still in place with much of its trade with the US. It is not clear what Biden will do, if anything, come his inauguration on January 20th.
China certainly turned its attention to Australia later in 2020. Given its size, Australia is a smaller target than the US and it is seen as a close ally to it.
At first, refusing entry of lobsters and some shiploads of coal seemed a bit random. But the list keeps growing without resolving any of the former issues. Since there seem to be no clear guidelines on what will happen going forward, owners of the exports do not know what to do with their cargoes and the shipowners have their capital languishing around Chinese ports. It is a brave (or is it foolish?) person who predicts what China may or may not do.
Although the US presidential election result was called some time ago, Trump has not yet publicly accepted defeat. Nevertheless, Biden will be sworn in as president on January 20th. And now, winning both of the Georgia Senate seats has handed control of the Senate and the Congress to the Democrats in turn empowering the Biden administration to govern without the frustration of having to deal with a Republican controlled Senate.
Different US states can have different voting rules. Georgia is not a first-past-the-post state so it must hold a fresh election after no candidate reached 50% of the vote in November. (They do not have preferential voting as we do in Australia)
It is also unusual for two seats to be up for election at the same time. The second seat came into play because a sitting senator resigned before the election and so a temporary senator was sworn in.
US economic data picked up strongly in Q3 but renewed lockdowns of varying intensities lead some to predict negative growth in coming quarters.
Biden is committed to a variety of tax increases (income, company and capital gains) but the fragile nature of the US economy could soften his agenda.
Because Trump delayed in signing the latest COVID relief package, millions of Americans will have gaps in their welfare payments. Many will now get only a $600 relief cheque compared to $1,200 in 2020 and the $2,000 wanted by many for 2021.
No doubt the US will muddle through managing its economy but we do not see the new government moving swiftly through its agenda. Despite now having the balance of power in Congress the majority is slim and there are factions to deal with within both parties – as there are in our governments.
Boris Johnson and his team of negotiators pulled a rabbit out of the hat on Christmas Eve. Brexit negotiations which seemed to go nowhere for four and a half years suddenly came to fruition and both sides claim to be winners!
Britain got what it wanted on trade, regulation, competition policy and the movement of labour. They did have to give ground on access to British waters. The deal allows for Europe to have a 50:50 share of fish trawled in 2021 falling to a 25% share in five and a half years.
What is surprising is that the side that was pro-Europe in the referendum and thereafter were calling for all sorts of mayhem including a mass exodus from London’s financial centre. Clearly that is now seen to have been a massive miscalculation.
But Europe has imposed strong travel bans on flights from the UK because of the new strain of the virus. Because there will effectively be free trade between the UK and Europe, and certain drains on UK resources to Europe will cease or be limited, UK growth may recover strongly from its disastrous growth in 2020. However, the transition will not be quick.
Rest of the World
While vaccines are being rolled out in some of the wealthier economies, it is not yet clear how developing countries will be allocated vaccine supplies. In order to insulate the world from further outbreaks, all countries need access to appropriate healthcare.