The virus is back in Sydney.
Until a vaccine is widely distributed, outbreaks will occur.
The outbreak on the Northern Beaches of Sydney is a humbling reminder that we really can’t relax on the COVID front until a vaccine arrives here.
It’s also a reminder that these types of outbreaks are what caused the coronavirus economic crisis back in late March.
The Northern Beaches is in shut down and, I’m sure, given residents are being told to stay at home, local commerce is suffering.
So, in looking at the key risks or threats in 2021, look no further than COVID-19.
Key risk: COVID-19
At least two pharmaceutical companies have developed vaccines likely to be widely distributed.
Rollout to those most at risk has already begun in Britain.
There’s every chance the distribution of the drugs will expand and, as early as mid-next year, Australians may have access to the vaccine.
There is, however, the potential for problems within the distribution process. As a very simple example, it just takes one person to have a medical episode after receiving the vaccine – with no prior history of medical problems – for the process to halt.
The logic is the same as always, as long as the virus is spreading, businesses are at risk of shutdown, hiring of workers is held back, business investment is stymied, and the economy can’t grow at anywhere near capacity.
This hurts business turnover, business profits and ultimately workers.
You might be thinking – that all sounds pretty grim, and yet the share and property markets are both doing so well. So, what gives?
Well, the policy response to the coronavirus economic crisis has helped both the economy and financial markets.
The government policy response has kept hundreds of thousands of Australians in work – via JobKeeper and JobMaker hiring credits.
However, it’s the Reserve Bank’s monetary policy that’s ensuring deep money flows into the stock market – indeed the stock market is close to returning to its February highs.
The property market is also benefiting from record low interest rates as well as now relatively stable levels of employment.
Of course, property’s also been given a kick-along with a relaxing of some lending restrictions and mortgage loan deferrals.
All of the policy responses have ensured financial market stability.
Adjustment back to ‘normal’
It all raises some obvious questions, what happens when the economy really starts to pick-up pace?
Will interest rates rise, or worse still, will taxes rise to help back for the roughly $1 trillion in forecast government debt?
That surely wouldn’t bode well for investors? Well, no, it wouldn’t, but there’s something else we need to consider.
We’re already starting to see signs of economic recovery and it hasn’t hurt markets.
Late last week for example ABS data showed the unemployment rate came back down in November to 6.8 per cent.
It’s pretty clear from the data though that much of the snapback in employment (and it was a big snapback with roughly 90 thousand people finding work) was related to restrictions easing in Victoria.
Elsewhere (outside of Victoria) the data was pretty weak.
That is to say, at this point economic growth is being generated by enormous policy stimulus from the state and federal governments, as well as record low interest rates, and a nation with remarkably low coronavirus cases (from a global viewpoint).
What we’re not seeing is strong, organic, sustainable economic growth – the kind of growth driven by business investment and a strong wave of hiring intentions that come with it.
Implications for you
What all this means is that risks remain high.
Australia has so far proven itself very capable of managing local outbreaks, but if any state bears the brunt of a second or third wave, and another hard lockdown is imposed, all bets are off.
There’s a limit to how far policy makers will go to save the farm, so share and property market rises from here may be capped.
In a best-case scenario a vaccine is rolled out, confidence lifts, employment grows (sustainably) and the share and property markets find a new, better, solid footing.
This could also bring higher interest and tax rates. Both have the potential to stymie growth in property and share markets.
On the flipside, further outbreaks and complications with a vaccine rollout have the potential to produce both share and property market corrections.
The only way to respond to all of this is to stay vigilant.
Stay COVID safe.
Any employment is better than unemployment but do your best to secure on-going work. I don’t think there’s ever been a more important time than now to seek out secure full-time work.
And when it comes to investing, accept that money won’t do any work for you at all in the bank, and share and property markets remain risky – but they’re also where you’ll likely gain returns north of 5 per cent.
Crises generate risk and opportunity. The coronavirus crisis in many ways hasn’t left us just yet, and so the opportunities remain.
But the economic environment we find ourselves remains uneasy.
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