The Big Issues of 2021
- For the past 19 years CommSec have produced “The Big Issues” report – a report that has sought to highlight the issues that are expected to influence the economy and financial markets over the forthcoming 12 months.
- This is not a crystal ball gazing exercise. The aim is not just to forecast where certain economic variables are likely to be in a year’s time. Rather the focus has been to highlight trends, issues and ‘big picture’ influences that act as threats or opportunities for consumers, investors and businesses alike.
- The aim has been to produce an informative document that is jargon-free. The intention over time has been to produce a commentary that causes people to think and ask the ‘so what’ question – that is, to determine what this means for their own circumstances. If one or a number of the Big Issues were to prevail over 2021, what would this mean for you or your customers/clients?
- We undertake this analysis by balancing the text with a healthy spattering of graphs and pictures to best highlight the issues we think will prove important in 2021.
- This year CommSec have our usual Big Issues list. But we have also added a list of Talking Points: topics that may not attract the same attention but are likely to form part of economic discussion over 2021.
- You may not agree with all of the choices mentioned in the 'Big Issues for 2021', but hopefully the discussion prompts you to come up with your own list of things you will be watching closely over the coming year.
Review of the Past Year
- In addition to CommSec's ‘Big Picture’ analysis of key economic issues, CommSec features a recap of the past year’s economic performance together with an outlook for the economy for the coming twelve months.
- This economic assessment largely sets the scene for the discussion of the Big Issues. Because there are themes and trends that have evolved over the past year to affect economic performance. A valuable starting point is to establish whether the same factors or indeed new factors are likely to dominate in the coming year.
- The economic forecast table opposite is exactly the same table used last year to assess the outlook for 2020. And it clearly demonstrates how the COVID-19 virus changed everything – it literally changed the world.
- The Australian economy entered recession in the March quarter for the first time in 28 years – impacted by the coronavirus as well as drought, bushfires and storms. The Australian economy contracted by 0.3 per cent in 2019/20. And in the June quarter alone the economy contracted by 7 per cent – the biggest fall in activity since the end of World War II.
- While this was a huge contraction, it was actually a better outcome than experienced by nearly all advanced economies. A key reason for our relative out-performance was the speed and size of economic stimulus and support supplied by all levels of government and the Reserve Bank.
- The cash rate currently stands at 0.1 per cent; Aussie dollar is near US73 cents; unemployment stands at 7.0 per cent; annual inflation is 0.7 per cent; and the All Ordinaries is near 6,800 points.
The Year Ahead
As we approach the end of the 2020 calendar year, it is clear that COVID-19 still dominates the landscape.
- The bad news is that Europe and the US are experiencing second waves of the virus, driving case numbers to record highs and necessitating fresh lockdowns.
- The good news is that an effective vaccine is expected to be distributed across the globe, perhaps starting within a month. And treatments for the virus are also being developed.
- The economic outlook will clearly be dictated by the virus and how quickly a vaccine (vaccines?) can stem case numbers and allow economies to start repairing.
- After contracting an estimated 3.5 per cent in 2020, the global economy is tipped to rebound by 5.0 per cent in 2021. On the same basis, the Australian economy is tipped to grow by 4.2 per cent in 2021 after contracting 3.3 per cent in calendar 2020.
- The Reserve Bank Governor has committed to leave the cash rate at 0.1 per cent (or even lower?) for three years. Bond purchases are being employed with the hope of reducing longer-term yields.
- Underlying inflation is expected to broadly hold near 1 per cent over 2021.
- Unemployment is the focal point of all monetary and fiscal policy actions. Commonwealth Bank Group economists expect that the jobless rate has peaked at 7.5 per cent. The jobless rate is expected to ease to 5.75 per cent at the end of 2021 and ease to 5.0 per cent by end 2022.
- The COVID-19 coronavirus pandemic dominated attention over 2020. And despite recent encouraging news on the vaccine front, Covid will be front and centre in consciousness over 2021.
- It is generally accepted that the coronavirus outbreak began in a seafood market in Wuhan, China in late December 2019. It is believed the virus was passed from bat (or snake) to human. The South China Morning Post issued a report on January 1, “China shuts seafood market linked to mystery viral pneumonia outbreak.”
- On January 5 there were only seven references in world print media to ‘coronavirus’. References averaged around 200 a day from January 9-16. World consciousness of the virus increased from around January 20. On January 30 the World Health Organisation declared the novel coronavirus a global health emergency.
- From the first case identified in late January, case numbers hit a peak in China at 58,016 on February 17 before declining. Global case numbers also eased to March 7 before then accelerating higher again.
- In response to the medical threat, Governments across the globe locked down their borders and economies. The degree of stringency varied as did the relative success in suppressing the virus. And in response to lockdowns, economic activity slumped.
- Commonwealth Bank group economists expect the global economy to contact around 3.5 per cent in 2020 before rebounding 5 per cent in 2021. The economic downturn is the worst since World War II – or in peacetime, the worst downturn since the great depression of the late 1920s/early 1930s.
- But forecasts are under constant review. European economies and the US are seeing second waves of the virus, lifting case numbers to record highs. But, on a more positive note, two pharmaceutical groups – Pfizer/BioNTech and Moderna – have both announced encouraging results with vaccine trials. Pfizer said it expects to produce up to 50 million vaccine doses in 2020 and up to 1.3 billion doses in 2021.
- Worldometer estimate that coronavirus case numbers stand at just over 55 million with over 1.3 million deaths (death rate of around 3 per cent). Active cases currently number 15.6 million. Australia ranks 94th in case numbers of 219 countries.
- There is probably not one aspect of our lives that has not been touched by coronavirus. And many of the effects will be long-lasting such as the way we work, study, interact, travel and shop.
The Joe Biden Era: The 46th US President
- Former US Vice-President Joe Biden has declared victory and is set to be inaugurated as the 46th US president on January 2021. The Republicans are expected to retain control of the Senate while the Democrats will retain control of the House of Representatives. Mr. Biden’s presidential pitch (labelled ‘Bidenomics’) can be found at www.joebiden.com
- US sharemarkets rallied to record highs in the aftermath of the US election. Investors hope that US President-elect Biden announces a stimulus package of at least US$1 trillion, which could boost US economic growth, returning the economy to pre-pandemic levels by the end of 2021. But the Republican-led Senate could oppose a large increase in government spending with gridlock a likely feature on Capitol Hill over the next two years as it was over the Trump era.
- As President, Joe Biden could introduce tougher financial regulation and impose anti-trust measures on big technology companies. In a development that will concern Wall Street, Mr. Biden’s agency review team already includes Obama-era regulator Gary Gensler, who was most aggressive in implementing the Dodd-Frank financial reform law following the Global Financial Crisis. And Democratic Senator Elizabeth Warren, now a key voice on financial regulatory issues, opposed US Federal Reserve Chairman Jerome Powell’s nomination in 2018. Mr. Powell’s term expires in February 2022.
- President-elect Biden’s engagement with China on trade issues will also be a key focus along with his foreign policy objectives in the Middle East. This is of especial importance to Australian businesses and investors. The global economy slowed over 2019 as the Trump trade war soured US-China relations, creating uncertainty for businesses and financial markets. Most observers believe that Biden will adopt a tough but conciliatory stance with China rather than a ‘tit-for-tat’ tariff battle.
- Finally, the most pressing domestic policy focus at the beginning of a Biden presidency is the pandemic. From an economic policy standpoint some believed that there was an immediate risk that he may impose nationwide lockdowns to slow the spread of the coronavirus, stalling the US economic recovery. President-elect Biden has ruled this out: “I’m going to shut down the virus, that’s what I’m going to shut down. I’ll say it again: No national shutdown. No national shutdown”.
But supressing and containing the virus could be the hallmark of a Biden presidency - the primary reason why he defeated Mr. Trump - the first incumbent president to lose office since 1992.
- Last year, the Big Issues featured “The future of monetary policy”. The key reason for the inclusion was that interest rates across the globe had fallen to record lows. At the same time there seemed limited scope for rates to rise with unemployment and inflation both at historically low levels.
- Well, in response to coronavirus, interest rates have been reduced even further. Policy rates remain negative across Europe and Japan and between zero and a quarter of a per cent (or 25 basis points) across other developed nations.
- Interest rates are set to remain super low for some time. In fact the Australian Reserve Bank has given a commitment to not lift the cash rate for at least three years. On its projections, inflation will struggle to get near the bottom of the 2-3 per cent target band over the forecast horizon.
- While monetary policy was once all about adjusting interest rates (or the price of money) that is no longer the case. The Reserve Bank Governor said as much recently: “Over recent decades, monetary policy has been about the price of money, or the short-term interest rate. Little attention was paid to the quantity of money. This has now changed, with the RBA now undertaking QE, or quantitative easing, as many other central banks are also doing.”
- The aim is to drive longer-term interest rates lower, reducing the debt servicing costs for governments and to reduce funding costs for banks. Other changes to the operation and focus of monetary policy includes forward guidance; monetary policy objectives; and the increased use of fiscal policy in managing the economy in conjunction with monetary policy.
- Some have also coined the phrase ‘Modern Monetary Theory’. As the RBA Governor describes it, this is the proposition that government should just keep spending to achieve their objectives—either full employment or inflation or whatever – and it shouldn't worry about financing. The Governor says this is not monetary policy at all, rather fiscal policy. But what it does highlight is the inter-relatedness of policy at low interest rates to achieve economic goals. Clearly, times have changed the way we think about things and how the economic world works.
- China has featured on the Big Issues list for each of the past five years. Indeed China has been a regular feature on the list for more than a decade.
- Over the past two years the Big Issue was represented as “United States-China relations”. In 2018 the issue was represented as “The ‘slowdown’ of the Chinese economy”. And indeed China featured twice on the 2020 list with the addition of “The road ahead for the Chinese economy”.
- There were two areas of concern last year. The first was the trade stoush between the US and China and the implications for financial markets and for the Australian economy. The second area of concern was more in the medium-term – the ageing of the Chinese population and whether the economy would face similar challenges that Japan has endured from as far back as the 1990s.
- Clearly self-interest rules when it comes to China. China is by far Australia’s biggest trade partner accounting for almost 40 per cent of Australia’s goods exports. And China accounts for a record 28 per cent of Australia’s imports. Until recently China was our largest source of tourists, but it continues to challenge New Zealand for top spot.
- Encouragingly China appears to have weathered the virus pandemic quite well. The virus reportedly began in Wuhan in late 2019 and case numbers in China quickly expanded to more than 58,000 by mid-February. But case numbers peaked at those highs and the country avoided the significant second wave spike in case numbers that has been experienced in the US and Europe.
- China could be one of the few countries to grow in 2020 with CBA group economists tipping growth of 1.8 per cent, accelerating to 9.1 per cent in 2021 before lifting 5.6 per cent in 2022. Clearly that is positive for the world more broadly and for Australia.
- On the trade front, it is uncertain how relations are likely to fare with the new Biden administration. The belief is that President-elect Biden will emphasise that China must operate on the same level playing field as other advanced nations. However tariffs are not expected to feature to the same extent as an enforcement mechanism.
- Apart from goods trade, issues of contention between China and industrial powers include intellectual property rights, Taiwan, territorial claims in the South China Sea, Hong Kong and calls for an inquiry into COVID-19.
- It is the latter that has led to frictions with Australia and it will be a key focal area in 2021.
- Government action on climate change has stalled over the past year. Clearly, COVID-19 has dominated attention with leaders focussed on protecting the vulnerable, trying to keep people in the jobs and trying to keep businesses in business.
- But if the coronavirus pandemic has taught us anything, it is the power of co-operation. Researchers have determined that it is rare that a vaccine is developed within 4-5 years of the outbreak of a new virus. But based on recent announcements from pharmaceutical companies, a covid vaccine is likely to start production and distribution in less than a year from outbreak.
- While this suggests hope that nations can work together to take action on climate change, the question is whether economies must be on the brink of disaster first or lives have to be at risk. Hopefully that won’t be the case.
- A lack of resolve from the Trump Administration in the US also accounts for some stalling in moves to address climate change. But President-elect Joe Biden is expected to take a much more active approach. The New York Times recently noted that “one of Mr. Biden’s early executive orders is expected to require that every federal agency, department and program prepare to address climate change.”
- The US President-elect has outlined plans to achieve ‘net-zero emissions, economy-wide, no later than 2050’ (https://joebiden.com/clean-energy/). However one potential obstacle to advancement of the agenda may be a divided Congress with the Republican Party tipped to maintain control over the Senate.
- On a recent meeting with his Japanese counterpart, Australian Prime Minister Scott Morrison was less comital saying that "Australia also shares an ambition for net zero emissions but what we are focused on is how get there and (how) that can be achieved.” In his first policy speech to Parliament in late October, Japanese Prime Minister Yoshihide Suga pledged to cut greenhouse gas emissions in Japan to net zero by 2050.
- The pandemic recession hasn’t been your typical recession. While some businesses have suffered, some have thrived. People have been forced to work from home. And guess what? Some have liked the experience. Not so much that they have wanted to work from home five days a week. But the flexibility has been refreshing for some and led to increased productivity for others.
- The speed and magnitude of the policy response – fiscal and monetary – has been important. And the ‘shotgun’ approach of the various measures has also been important. That has certainly been the case in Australia: access to superannuation; wage subsidy schemes like JobKeeper; regional support; industry support. They have all made a difference.
- The aim has been clear: to keep business in business and keep people in jobs. Economies were forced into lockdown to stop the spread of the virus and protect the health system. So the support measures were necessary.
- Governments and central banks have also learned the lessons from past downturns. The longer that people are out of work, the less employable they are likely to be. In past recessions, unemployment has risen quickly, but taken a long time to return to the pre-recession level.
- Measures like JobKeeper are designed to keep workers attached to their workplace. So when the hibernation people ended – the theory goes – a high proportion of workers can return to their jobs.
- And 2021 will determine how well the theory works. At the start of the crisis, the Reserve Bank and Federal Treasury expected the jobless rate to peak over 10 per cent. Now the expectation is that the jobless rate could peak at 8 per cent or below.
- The development of a vaccine(s) raises the prospect of a faster-than-expected economic recovery. And that raises the prospect of the jobless rate returning to 5 per cent quicker than expected.
- Certainly the job market will be one of the Big Issues in 2021 for the simple reason that it is the principal target of fiscal and monetary policies. The Reserve Bank notes that addressing high unemployment is an “important national priority”.
- Economic inequality has featured on and off in broader economic debate over recent years. And COVID-19 has highlighted the gap between economic, racial and demographic groups. The World Bank now projects that by 2021 an additional 110-150 million people worldwide will have fallen into extreme poverty. And around 1.4 per cent of the world’s population may have been pushed into extreme poverty by the pandemic recession with poorer informal sector workers hit harder than those on higher incomes or with assets.
- Why? Advanced or developed economies have rolled-out large-scale government spending programs - to protect their citizens from the deep economic downturn caused by coronavirus-related government restrictions. But emerging or developing economies aren’t so fortunate – with weaker health care systems, wage and welfare safety nets and macroeconomic policy tools at their disposal.
- The pandemic has also revealed deep social divisions in advanced countries. Almost 40 per cent of US job losses have fallen on those earning less than US$40,000 per annum, according to US Federal Reserve Chairman Jerome Powell. And then there is the ‘digital divide’: according to the International Monetary Fund less than half of the developing world’s population have access to the internet -– depressing productivity and health safety in emerging and developing countries.
- In terms of COVID-19 in Australia, targeted assistance has supported vulnerable groups including younger and older Australians and the unemployed. Economic inequality has been less of an issue in Australia over time than in other parts of the world. According to the HILDA survey from the University of Melbourne: “there has been little net change in income inequality between 2001 and 2018. For example, the Gini coefficient, a common measure of overall inequality, has remained between 0.29 and 0.31 over the entire 18 years of the HILDA Survey.” HILDA also noted: "The “anchored poverty rate was 13.1 per cent in 2001 and was only 4.3 per cent in 2018.”
- But in a year when the virus vaccine starts rolling out, the question of which countries get it first in 2021 will be of keen interest. And that may promote debate about economic inequality issues more broadly.
- Major advanced countries have been quick to put their orders in for the coronavirus vaccine. Of the 1.3 million doses of the vaccine that Pfizer intends to produce, the Centre for Global Development estimates that 80 per cent has already been secured by the US, UK, EU, Canada and Japan.
- Concern about the ability of low and middle income countries to get access to a vaccine for COVID-19 led to COVAX. ”Covax is co-led by Gavi, the Coalition for Epidemic Preparedness Innovations (CEPI) and WHO. Its aim is to accelerate the development and manufacture of COVID-19 vaccines, and to guarantee fair and equitable access for every country in the world.”
- In mid-November Gavi said that “over US$2 billion has been raised towards the effort to ensure equitable access to COVID-19 vaccines for low- and middle-income economies, with at least US$5 billion more needed in 2021.”
- While so far the degree of support and co-operation by the international community on creating access to a vaccine for poorer countries is encouraging, the test lies ahead. The success or otherwise will prove important in highlighting economic inequality issues more broadly.
- To further highlight just how many of the Big Issues of 2021 stem from the central issue of “COVID-19” we expect that Migration will be one of the issues to watch in 2021.
- The foreign borders are effectively closed. Those people that do arrive in the country need to isolate for 14 days. And getting on a flight to Australia is now a difficult and expensive exercise. There were just 3,720 ‘short-term arrivals’ (students, tourists and business people) in September.
- There were 8,850 people defined as ‘permanent or long-term departures’ in September. There were 4,320 people defined as ‘permanent or long-term arrivals’. On balance, 4,530 people left Australia in the month and 15,920 have left Australia over the past six months.
- In a ‘normal year’ around 25,000 people per month (in net terms – arrivals less departures) would arrive in Australia to live and work. Apart from times of war, there has never been a time like this. In the 44 years of monthly records there has never been three months in a row where more people left Australia than settled here. That is, before September 2020.
- At this stage there could be at least two vaccines in production in 2021 and being distributed across the globe. But it will take some time for enough people to get the vaccines and for ‘herd immunity’ to take hold. The foreign borders will be closed for much of 2021 but there is the prospect of more travel ‘bubbles’ opening up.
- But as the Reserve Bank Governor highlighted recently: “Over the past two decades, Australia's population grew at an average annual rate of 1½ per cent. But in 2020/21, it is expected to increase by just 0.2 per cent. This will be the slowest rate of increase since 1916, when many Australians left our shores to fight in the First World War.”
- Australia has relied on firm population growth to fuel economic growth for decades. Population growth of around 1.5 per cent a year and productivity growth of 1.0-1.5 per cent underpinned sustainable economic growth of 2.5-3.0 per cent.
- The longer that foreign borders are shut, there will be negative implications for housing and housing-dependent sectors, regional areas, and construction, tourism and education sectors.
Rewind: The Big Issues for 2020
- As we noted at the start of this report, we have been producing Big Issues for the past 19 years. It is interesting – and perhaps even instructive – to rewind over the past year and assess what we had on the radar in December 2019.
- Looking ahead into 2020, we highlighted eight issues. And the first issue was “United States-China relations”.
- We’ve had this on the list for two years but it certainly didn’t dominate attention like it did in 2019. US-China relations remain frosty but so do relations between China and most advanced nations including Australia.
- The second issue was “Full employment”. A year ago the Reserve Bank was intent on ramping up growth in the hope of testing how low unemployment could fall. But while jobs were in the spotlight in 2020, the focus of governments and the Reserve Bank has been the desire to protect as many jobs as possible. In fact the Reserve Bank believes job creation is a ‘national priority’.
- Number three on the Big Issues list for 2020 was: “The future of monetary policy”. And indeed this issue has received much discussion especially with interest rates a smidgen above zero and the Reserve Bank largely ruling out negative interest rates. Policy is now largely pre-occupied with buying bonds in the hope of driving longer-term rates lower.
- It was quite appropriate that “Fiscal policy: stimulus or surplus?” was on the Big Issues list for 2020. The emergence of the COVID-19 pandemic and the need to lock down the economy meant that both fiscal and monetary policy needed to be dialled up to their maximum settings to support businesses, workers and the vulnerable. The Federal Government didn’t have a choice – the answer to the question was that the good budgetary or fiscal settings should be used to stimulate the economy as opposed to the Government seeking to build up budget surpluses over time.
- The fifth issue was “The road ahead for the Chinese economy.” Like other issues on our 2020 list, this issue was viewed through the lens of COVID-19. China was hit first by the pandemic, but the country successfully flattened the curve and is now solidly in recovery mode. And given that Europe and the US have been hit by second waves of the pandemic, the strength of the Chinese economy has been important in supporting the global economy. It has also been important in providing support for the Australian economy.
- “Oil prices” has regularly appeared on the Big Issues list over the years. And the issue again has been a key focus of discussion in 2020. Major producers were forced to restrain supply in response to the drying up of global demand. And while OPEC+ producers struggled at various points of time with the objective, crude oil prices are ending 2020 near US$40-45 a barrel – a level that many would see as a good level for both consumers and producers in a challenging environment.
- “The East Coast drought” was a key 2019 issue but didn’t extend its influence in 2020. The drought broke in many regions early in the year. And the El Nina weather event has ensured that much of the east coast of Australia received follow-up rain over the year.
- And finally we included a ‘no brainer’ on the Big Issues list in 2020: the “US Presidential Election”. This issue didn’t disappoint, being the focus of attention over much of the year with influence now extending well past polling day. There are still sub-issues to be resolved such as recounts, legal disputes and the composition of the Senate.
The information presented on this page is an extract of a CommSec Economic Insights report. The full report is published on the CommSec website (under Market News > The Markets). The extract and full report are approved for distribution in Australia only and must not be directed or distributed to any person or entity outside Australia.