We are probably in a recession right now. In this fortnights update we talk about why were down now but what could make the economy boom again next year and beyond.
Recession now, boom later
A technical recession for the second half of this year is all but confirmed, which means we are in it right now.
The question though, does that matter?
With NSW and VIC and thirteen million people in versions of the harshest lockdowns ever imposed globally economic activity is sure to suffer.
Reducing economic activity will lead to a drop in GDP, and if we have two consecutive quarters of negative growth in GDP, that is what is called a ‘technical’ recession.
Regardless if we are in a technical recession or not, many people will be experiencing very negative realities from lockdowns and might feel as though we are in one.
If we assume we are in a recession now, when we compare it to last year when we had an extremely quick ‘snap back’ recovery (the fastest in Australia’s history from any recession), the burning question is - will this time be the same with such a strong ‘snap back’ and sharp recovery?
Probably.
In this fortnights update I am going to try and outline a case for how the Australian economy will continue to boom in 2022 and beyond.
Before we talk about all the positives, let’s talk about few consequentially important and negative things.
Anecdotally, from reading mainstream news sites and social media, it seems like everyone is doing quite well during lockdown. Apparently, most people are still working from home, safe and happy, and the biggest concerns are about slow Uber Eats riders.
This is of course a false reality.
There is extreme inequality already in Australia (and globally) and during the current longest and harshest lockdowns this is being exacerbated.
The wealth gap between the ‘Haves’ and the “Have Nots’ is probably as wide as it has ever been, and that should worry us.
Huge gaps in wealth during debt fuelled booms that eventually result in recessions can make the civil unrest that causes enormous societal division and tension explode into something more confrontational.
Behind social media and news, there is a lot happening we do not understand. In a recent one of these updates we talked about how it is the second order consequences that should worry us the most.
What that means is that it is all the things that happen as a result of our decisions after the first thing we decided. For example, you decide to eat that hamburger, you put on weight. The weight gain is a second order consequence. This is particularly bad if you goal is to lose weight.
Another example is the government decides on lockdown. The (first order) aim of this is to stop the spread of the virus and limit people getting sick. The (second order) outcomes that come from this are diminishing case numbers, but also other unintended and unknown issues in other areas like suicide, mental health and others. If the goal here is to minimise people getting sick, the unintended (second order) consequences are counterproductive to that goal.
We do not really know or can guess what the consequences of having or not having lockdowns is, neither is good, it is a decision between bad or worse.
The knock on and ripple effects from all of this will last lifetimes and we just can’t see that far ahead to know.
One thing we do know is that when incomes are reduced it causes problems, and that incomes have been reduced through lockdowns.
The shuttering of hundreds of thousands of small businesses, furloughing, standing down, and letting go of employees have dramatically lowered incomes and this will have serious implications.
You could argue that people could get the government subsidy income payment of $750, but that amount is probably lower than they would have been able to make working in their normal jobs, which means their income is lower.
As incomes are lowered that generally means people spend less as well, and since one person’s spending is another person’s income, with spending down, incomes are down.
Incomes and spending down, makes the GDP go down, which makes the economy go down.
Lowered incomes effect people differently depending on their circumstances, and some are hit harder than others. This is especially true to lower socioeconomic families that already might have had income, food or even shelter insecurity.
A harsh reality is that the (worlds) poor are suffering more than the middle class and rich from the virus crisis. Many middle-class people in white collar jobs can easily work from home, while many less wealthy people earn money from turning up at a factory or driving a bus, they can’t do their job over zoom.
Inequality was already a structurally significant but unpopular topic to discuss before the virus crisis and not being managed or dealt with effectively or meaningfully, that doesn’t appear like it will change now, in fact it looks like it could get worse.
We will likely and unfortunately get confirmation of a technical recession later this year, but let’s look optimistically into 2022.
The making of a boom
The good news of incomes dropping so quickly is that we know they can come back very quickly.
A sharp pick up in new jobs and especially with small businesses being able to reopen their doors is inevitable, but there is the question of how many small businesses did not survive the lockdowns.
Regardless for every job or dollar lost in income during these lockdowns they “should” come back fairy quickly.
On top of that, there are a few key reasons to be optimistic for the future. You can see the mid-year snapshot from a couple of months ago here where I outlined many current forces impacted finance and the economy.
Here are the reasons I believe we will have strong economic recovery.
Property prices
Even during what will turn out to be over three or four months of some of the world’s strictest lockdowns in NSW, property prices have stayed buoyant, even increased in the high-end part of the market.
Avid readers will recall my repeated correct predictions for record high property prices, and I think in 2022 we will see new highs, again.
Property prices help people have a sense of confidence and their wealth, and as prices remain strong and increase, it improves consumer sentiment, which I believe will translate into strong consumer spending.
The more people spend, the more incomes will repair, because one persons spending is another person’s income.
High demand
If history of lockdowns has taught us anything it is that when people are released from their residential confinements, they want to get out and about as much and as quickly as possible.
This might not be exactly the case this time around, considering the 2020 Sydney lockdown as about a month, while the 2021 Sydney lockdown will be almost four months, and that prolonged distance from people will cause some to withdraw and experience loneliness and disconnection from society, family and friends.
However, those that do get out will likely have a bit of cash saved up and ready to go. The banking data suggests savings is at record highs with many middle-class Australians, and those same people will be keen to book Qantas flights to wherever they can go.
Hopefully they are not planning to go to the Sunshine coast or Barossa Valley, as those states appear reluctant to open to infected states.
Things that will see more than a few dollars spent on from high demand will include nice meals at cafes, restaurants and pubs, along with all the drinks. Personal grooming, fitness and retail health services and travel.
That high demand for almost everything will see spending skyrocket which will help boost incomes and jobs.
Business investment
For all the dollars not spent during this lockdown by businesses on capital expenditure for new equipment, machinery or property, the lenders are still holding onto those dollars and ready to give them to willing and able borrowers.
There is huge amount of liquidity in the market at the moment for business lending and more options for small businesses than ever before. This increased amount of capital and the competition it brings it helping keep lenders keen to lend, which will keep credit circulating in the economy.
On top of competition, rates are (still) at historical lows, and I would suggest to you that with the aforementioned competition those rates will not be heading upward anytime soon.
Businesses will need to be mindful of the cashflow gap, but there are many options which Skyward Financial can help with so Let’s Talk.
The continued low rate environment will produce attractive investment opportunities for business as they will reap return on their investment faster and capitalise on growth, while benefiting from favourable government tax incentives for asset write offs.
Immigration
One of the keys to the luck and success of Australia is the multicultural nature of our society.
This has been from high immigration from a diverse number of countries that have seen our country being probably the most multicultural on earth. This is luck is both by chance of geographic location, and self-made by having a welcoming society, good schools, world class health care system, low violence and strong social cohesion.
While much of that might seem up for debate it largely still remains true now and will continue to remain true for the foreseeable future.
These are the reasons why Australia will be a very attractive place for smart, educated, and wealthy expats to choose Australia as their new home.
Particularly those from Hong Kong, US and UK. Our boarders will need to open eventually and people will need to learn to live with the virus, just as we do with every other one, and we will need to invite people to live here to help us continue to prosper.
People in Hollywood and in tech will be particularly attracted to moving here after Russel Crowe is building a film studio and the acquisition of Afterpay by Square.
We talked in the previous update about the reverse brain drain which touched on all of this and more, and immigration will drive the economy to a strong recovery.
Bring on the boom.
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