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Lockdowns cost economy $25bn, but shares are still surging: Here’s why

The ASX board showing stock price numbers and people line up outside a COVID-19 testing clinic with masks.
The Aussie economy is under pressure from lockdowns but the markets have remained resilient Here's why (Source: Getty)

Over the last year the Australian share market has continued to hit new highs, despite the resurgence of COVID-19 lockdowns.

But why, when lockdowns have cost the economy around $25 billion since May, are markets undeterred?

According to AMP chief economist Shane Oliver, optimism is being born from both the last rebound and the knowledge that another rebound may be on the horizon.

“While it may seem perplexing there are good reasons behind the resilience so far in share markets: earnings news has been strong with investors cheering the return of capital via dividends and buybacks from several companies,” Oliver said.

“Last years’ experience showed that the economy will bounce back strongly, helped by massive fiscal support. Also, monetary policy may now be easier for longer.”

ASX 200 chart as at 1 September 2012
(Source: Yahoo Finance)

Vaccines show light at the end of the tunnel

The vaccine rollout in Australia, while slow to start off with, has picked up a lot of momentum in the past two months.

And Oliver points out that other countries with a high vaccine rate are allowing their economies to open back up.

“The good news is that around the world, vaccines are working. Less so in preventing infection and onward transmission, but particularly so in preventing hospitalisation and death,” Oliver said.

“Highly vaccinated countries are shying away from new lockdowns.”

And Australia may be next to join in the fun - with experts estimating we will reach the 70 per cent vaccination target by mid-October.

“Hitting that level of vaccination will require a bit of carrot and stick. Restrictions on what the unvaccinated can do appear to be on the way in Australia,” Oliver said

And it’s this good news that is also providing support for equities.

“While shares are at risk of a short-term correction possibly on Delta concerns and as the Fed moves closer to slowing its bond buying, we ultimately see the rising trend continuing.”

Economic rebound on the way

Oliver predicts Australia will see an economic rebound by December this year, if all goes to plan, and early next year if not.

“Pent up demand supported by government pandemic support payments are anticipated to be spent and we expect GDP growth through next year to be well above 4 per cent albeit that will come from a lower base than previously expected,” he said.

And, he is not the only one who believes a rebound is on the way. Reserve Bank of Australia governor Philip Lowe also shares the sentiment.

“The economic recovery in Australia has been stronger than was earlier expected. The recent outbreaks of the virus are, however, interrupting the recovery and GDP is expected to decline in the September quarter,” Lowe said at the August statement on monetary policy.

“The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly. Prior to the current virus outbreaks, the Australian economy had considerable momentum and it is still expected to grow strongly again next year.”

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