Understanding financial advice
Financial life goals
Tools and resources
Products and services
Investing with IOOF
Your retirement goals
Vaccine rollout continues to drive the economic recovery.
While the global trend for COVID-19 infections has started to head up again, particularly the more transmissible variants, including the Delta strain, vaccination programs seem to be doing a good job at allowing reopening to continue as countries learn to live with the virus without rising cases overwhelming the hospital system. In Australia, snap lockdowns in New South Wales and Victoria at the time of writing have demonstrated the need for a massive ramp up in local vaccination programs to ensure that re-opening does not lead to the hospital system being overwhelmed.
Market optimism and consumer confidence has rebounded sharply since early 2020 on the expectation that the global economic recovery will be sustained with markets reaching new highs. As 2021 has progressed, we’ve seen a shift in share market growth from the technology ‘superstar’ stocks such as Netflix, Google and Amazon, that drove 2020 returns, to the stocks that benefit most from economic re-opening such as resources and banks. Many share markets are now above pre-pandemic highs. However, the rise of the Delta variant and the likelihood of other variants emerging has meant that countries with very low vaccination rates, like Australia, remain vulnerable to rolling lockdowns. While vaccines appear to be effective against the Delta variant so far, it is possible that other variants could more severely challenge vaccine efficacy.
Policy makers, including the US Federal Reserve and Reserve Bank of Australia, have shown they’re committed to driving the recovery at least until we have adapted to live with the virus. Many financial commentators are discussing fears about a sustained lift in inflation, that is, a sustained rise in the price of goods and services. While inflation has lifted, this primarily reflects sectors that continue to experience supply disruption such as car manufacturing and building materials. Consumer demand is high, but many sectors have been ill-prepared to ramp up production quickly and prices have lifted. If the supply lines take too long to return to normal, temporary price increases, initially caused by scarcity, may become more persistent with expectations that inflation will become entrenched at a higher rate.
Australia’s economy is already back at pre-pandemic levels. In the first three months of 2021, Australia’s growth was better than expected following solid consumer spending, particularly in the services sector that includes transport, professional services, healthcare and entertainment for example. However, we shouldn’t forget that before the pandemic Australia’s economy wasn’t operating at capacity, meaning businesses weren’t tending to invest in additional capital or employ more workers to increase outputs. The current recovery will have to continue for some time yet to get Australia’s economy powering along at full capacity. The low vaccination rate is the primary roadblock to the Australian economy moving back to sustained growth.
A similar picture to Australia is apparent across most developed economies with sectors outside of technology struggling to deliver the jobs and wages growth experienced before the GFC. To some extent this shortfall has underpinned some of the relatively volatile politics we’ve seen in recent times.
While news is positive on the whole, policymakers worldwide are now facing the very difficult challenge of determining when, and in what form, they can return to pre-COVID life. Do we need to live with the virus, or can it be eliminated? The world will be looking to countries like England to assess how successfully they can reopen without overwhelming the hospital system. Success will ‘make or break’ the recovery.
Clearly a key risk is that virus variants may arise and challenge the efficacy of current vaccines. To date, while the Delta variant is possibly more infectious, it appears to be well controlled by vaccines.
One of the other key risks is inflation. Over the next decade we think inflation is likely to be somewhat higher than during the decade after the GFC and this may unsettle share markets, particularly as policy makers start to wind back current extraordinary stimulus measures, including ultra-low interest rates. At the moment share prices are expensive, boosted by supportive policy, so even a modest shift in policy expectations could rattle markets.
That said, currently most central banks expect that any large lift in inflation will be temporary and they’ll want evidence that there’s a sustained upward shift in wages supported by a continued fall in unemployment before they will start raising rates. This means it’s likely monetary policy will continue to be supportive until we return to pre-GFC type rates of growth and inflation at least.
If economies can continue to vaccinate, reopen, rebalance and support improvements to jobs and wages growth, risks should ease with the social and political pressures of recent years settling and that’s good news.
1. Bloomberg COVID-19 tracker, data as at 19 July 2021
Important information: This document is issued by IOOF Investment Management Limited (IIML) ABN 53 006 695 021 AFSL 230524. IIML is a company within the IOOF group which consists of IOOF Holdings Ltd ABN 49 100 103 722 and its related bodies corporate. This material may be considered to be general financial product advice. Before making any investment decisions, investors should consider their own objectives, financial situation and needs and read the relevant Product Disclosure Statement. The information in this document is current as at 19 July 2021. While this information is believed to be accurate and reliable at the time of publication, to the extent permitted by law, no liability is accepted for any loss or damage as a result of reliance upon it. Neither IIML nor any company in the IOOF group guarantees the performance of any fund or the return of an investor’s capital. Examples are illustrative only and are subject to the assumptions and qualifications disclosed. Past performance is not a reliable indicator of future performance.