Just like 2020 was the year of surprises many of us didn’t foresee, I believe 2021 will offer its own surprises – but this time, on the upside.
There is a perfect storm of economic outcomes and that’s what I’m going to be chatting about with Pete Wargent in today’s show as we have a look at the macroeconomic big picture that will affect our property markets, our economy, and our lives in general in the coming year.
It’s really only been a year since Coronavirus started to affect us.
Just look where we were in the middle of last year and it’s hard to believe where we are now.
- We’ve had spectacular success in containing the Coronavirus.
- The Morrison Government build the bridge he promised to get us across the other side and federal government and state government spending killed the recession, which was the deepest since the Great Depression.
- We now have record low-interest rates.
- A sooner-than-expected arrival of vaccines.
- And all the above has pumped up economic growth above expectations and helped the property markets and the stock market rebound, bringing both business and consumer confidence.
We have an embarrassment of riches, with our economy surging ahead, so I hope my chat with Pete Wargent will give you some more clarity about what the future holds so you can make better investment and business decisions.
Economic and property trends for 2021 with Pete Wargent
Our property markets don’t operate in isolation, so I believe it’s good to regularly have a look at the big picture, the macroeconomic factors affecting not just Australia’s economy, but the world economy.
Australia’s V-shaped economic recovery.
Australia’s economy has surprised on the upside.
While technically we had a recession last year – two consecutive quarters of negative GDP growth, really the March quarter had very minor falls in GDP – there was really only one quarter, the June quarter, with a significant drop in economic activity. And boy has the economy rebounded since.
Our economy is likely to keep performing well moving forward
While the recovery to date has unfolded much more quickly than expected, it is important to remember that:
- it has been uneven and
- that despite recovering to pre-COVID levels by mid-2021, there remains a high degree of spare capacity in the economy.
There is still some way to go and there are still risks ahead.
$120 billion savings war chest is firing our economic recovery
Saving is about to become unfashionable again.
After rushing to build deposits during the COVID crisis, it seems we are now determined to burn through accumulated cash. What’s more, the trend is going to accelerate.
New forecasts suggest that by the end of this year we will be saving less than half what we are putting away just now, and that level will be around a quarter of what we were saving at the peak of the crisis.
As panic swept the broader economy last year, the national savings rate soared to unprecedented levels, hitting 22 percent — or 22c for every dollar — at its peak.
To put that number in a historical perspective, it meant we saved $187bn in 2020, which works out at more than the total savings over the past 3½ years.
More recently the savings rate figure has started to drop, though it is still sitting somewhere near 12 percent.
The Commonwealth Bank estimates that households have put aside $120bn more than what is normally saved in the June, September, and December quarters last year — equivalent to 6 percent of the gross domestic product as overseas travel and social activities were curtailed.
The bank’s analysts believe this money will be spent over the next few years, providing continued economic momentum as a good chunk of this money will find its way into consumer spending.
And some of it will go to paying down debt and some will go into buying assets.
We’re already seeing this in retail spending and in our property markets.
RBA and interest rates
There has been a lot of chatter amongst media commentators that our booming property markets will force the RBA to intervene earlier than planned and raise interest rates.
But in his recent statement, RBA Governor Philip Lowe once again put these predictions to rest explaining that the surging housing market will not cause the RBA to raise interest rates.
He said it would not make any sense to do so.
I know the media loves headlines about rising interest rates, but Philip Lowe once again reminded us that his aim is to bring inflation sustainably within a range of 2 to 3% and to do this we need higher rates of wages growth and in his words: “The evidence strongly suggests that this will not occur quickly and that it will require a tight labour market to be sustained for some time.”
The Reserve Bank Governor emphasised this point, noting that the road to “normality” was long. Governor Lowe said that wage growth was a long way from 3 percent. And indeed
inflation was a long way from sustainably being back in the 2-3 percent target band.
Rising bond yields:
The Governor sought to emphasise that he believes that rising bond yields are sending false signals on the inflation risk and the potential for a lift in the cash rate: “market pricing has implied an expectation of possible increases in the cash rate as early as late next year and then again in 2023. This is not an expectation that we share.”
What else could our regulators do to subdue our property markets?
I understand why our regulators intervene in our finance and housing market, even though I don’t always like how they do this – we saw what happened with APRA overshot the mark a few years ago, but Philip Lowe said
“I recognise that low-interest rates are one of the factors contributing to higher housing prices and that high and rising housing prices raise concerns for many people.
“There are various tools, other than higher interest rates, to address these concerns, leaving monetary policy to maintain its strong focus on the recovery in the economy, jobs, and wages.”
Big Australia vital to protect the home front: Rudd
Prior to the pandemic, Australia’s population was growing faster than most other developed countries, and of course, this has now been temporarily put on hold.
With unemployment still high some people are wondering whether we should open our borders quickly, or whether we should restrict immigration until all Aussies find a job.
Recently former prime minister Kevin Rudd came out explaining how a Big Australia is needed on national security grounds to provide the tax and population base to increase the size of a military amid the challenges posed by China’s rise.
Global economic outlook
The rapid development of vaccines and their rollout has improved the global outlook and lessened some of the downside risks. The plan for further fiscal stimulus in the United States has also improved growth prospects there.
Links and Resources:
Metropole’s Strategic Property Plan – to help both beginning and experienced investors
Join us at Wealth Retreat 2021 on the Gold Coast June 12th – 16th – get more details here
Some of our favourite quotes from the show:
“There’s been a significant war chest of savings that now people are starting to spend.” – Michael Yardney
“I think we’ve got to acknowledge that while we’re saying Australia’s booming and the economy’s doing well and the property market’s doing well, there are still some people who are not doing well.” – Michael Yardney
“The media knows this. They know we react more to negative news than positive news. So they force-feed us negative news just to get the clicks.” – Michael Yardney
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