More positive outlook emerging for 2021

Economic E-News December 2020

By Craig Turnbull
Chief Investment Officer

2020 has been a year like no other. COVID-19 triggered lockdowns around the world, plunging the global economy into recession and share markets into freefall.

Many investors feared a very long and deep recession, but a more positive outlook is now emerging with the ASX 200 gaining 10% in November, driving the index back above 6,500 points for the first time since late February.

What factors are driving this positive outlook?

In recent months, global markets have reacted positively to the results of the COVID-19 vaccine trials. Pfizer, Moderna and AstraZeneca have all announced high rates of effectiveness in their phase 3 trials, raising expectations of a global rollout and an economic recovery in 2021.

China has already emerged from the pandemic with their annual GDP growth rate climbing back to 4.9% in September. Beijing’s $500 billion infrastructure spending has boosted the demand for commodities, particularly iron ore, pushing the spot price past US$120 per tonne in November.   

Closer to home, the success of the government’s JobKeeper and JobSeeker supplement measures means the unemployment rate is now likely to peak between 7% and 8% in 2021, well below the Reserve Bank (RBA) forecast of 10% just a few months ago.

The easing of restrictions has also boosted consumer confidence with more people heading out to hotels, cafes and restaurants. This increased spending helped to lift Australia’s quarterly GDP growth rate to 3.3% in September.

Meanwhile, record low interest rates are enticing Australians back into residential property with new home loans for owner-occupiers up more than 30% in the 12 months to October.

What are the risks to the economy in 2021?

The RBA expects the domestic economy to grow by 5% in 2021 but the recovery is likely to be uneven with some sectors facing serious challenges.

While China’s economic recovery is generally good news for the global and the domestic economy, escalating trade tensions are likely to hit some local industries hard.

China has already suspended imports from six Australian beef suppliers, imposed an 80% tariff on barley, and more recently, announced tariffs of up to 200% on all Australian wine. These changes will have a significant impact on producers that rely on exports into China for a large proportion of their earnings.

In November, the RBA reduced interest rates to put downward pressure on the dollar but strong commodity prices and a weaker US dollar have boosted the Australian dollar, up more than 5% since the RBA’s rate cut.

While a rising dollar may boost household spending on imported goods, there is a risk that a stronger dollar will undercut the competitiveness of Australian exports just as the world is emerging from recession.

However, any global recovery in 2021 will depend on a successful, widespread rollout of effective COVID-19 vaccines.

What does this mean for super and investment returns?

After the sharp falls earlier in the year, the recent strong gains on global share markets are welcome news for investors and super members in options with an exposure to growth assets.

The more positive outlook has boosted business and consumer confidence, and if this flows through to investment and spending, it should ultimately mean more jobs, good growth and healthier investment returns in 2021.

So, after a very challenging year, I encourage you to relax over the holiday season and look forward to a much better year ahead.

Take a look at the latest Active Super performance results.