December 20, 2020
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Looking into the post-COVID crystal ball: economic predictions for 2021

2020 will always be remembered as an incredibly tough and challenging year, but what's on the horizon for 2021? We see what the experts have to say.

Will 2021 officially bring us into a post-COVID economy, or will we continue to struggle with successive waves of the pandemic? Recent vaccination program roll outs could be a game-changer, making predictions for 2021 more complicated than usual.

Despite the uncertainty, we’ve taken a deep dive into some of the main predictions for the Australian economy, the real estate market, the stock market and the global economic outlook for the coming year. What did we see in the economic crystal ball for 2021?

Prediction # 1: The Australian economy

The Reserve Bank of Australia released a statement on monetary policy in November, with predictions for the economic outlook in 2021. The report stated that the economy is in the early stages of recovery following the largest contraction in a decade. 

Acknowledging uncertainty around the evolution of the pandemic, their predictions for 2021 include:

  • Economic activity with our major trading partners forecast to grow by 6% in 2021.
  • Australia’s GDP not expected to return to pre-pandemic levels until the end of 2021.
  • Unemployment rate to peak a little below 8%, above current levels but lower than the 10% previously predicted.
  • Wages growth and inflation to remain low throughout 2021.
  • Dwelling investment is expected to increase as the construction industry resumes normal levels of activity and the HomeBuilder program supports building activity.
  • A gradual recovery in non-mining business investment is expected to get underway in the first half of 2021 as the domestic recovery continues.

The RBA’s upside scenario predicts a stronger economic recovery if low virus numbers are sustained, particularly if the current COVID vaccination roll out shows signs of success and becomes widely available around the globe.

Read the RBA’s full statement here.

Prediction # 2: The real estate market

Every aspect of our economy has been impacted by the global spread of COVID-19, and real estate is no different. With overseas migration to Australia having plummeted from approximately 250,000 people a year to almost zero, what will this mean for the real estate market?

Demand for rental properties has fallen - putting downward pressure on rents - and the housing market is expected to underperform throughout 2021. The market has demonstrated some resilience in the second half of 2020 due to government financial support packages, interest rate cuts and mortgage repayment deferrals, but further price declines are expected as some of these are wound back.

Here’s a snapshot of some predictions for the real estate market:

  • Housing prices will continue to decline, bottoming out in June 2021. The CBA predicts a 6% peak-to-trough decline with strong rebound in prices in the second half of 2021.
  • Housing market recovery will be curtailed by continuing high unemployment - predicted to remain above 7% - until 2022.
  • A sharp rise in unemployment due to another wave of COVID-19 could drive property prices down by 10% to 15% over the next year.
  • We could see a wave of foreclosures coming in 2021, as mortgage relief options expire. Depending on the number and timing of foreclosures, this could boost affordability.

Download the Australian Housing Outlook 2020-2023 report.

Prediction #3: The Australian stock market

Imagine if we had a crystal ball back in 2019… Many of us would have invested in a little known video conferencing company called Zoom, which soon became one of the most successful brands of 2020 - and whose share price increased by 370% within a year.

The share market remained flat throughout 2020, which is no surprise given that we went through bushfires, floods, and a global pandemic. While we can’t know what will happen, the ASX has commented on the Australian share market in the coming year. 

While coy about making specific predictions, here’s what they say about 2021:

  • Corporate debt levels matter during times of economic stress: companies that can fund their operations - including growth - from internally generated cash flows outperform those that need to raise equity.
  • 2021 could be a rewarding year for capital management for investors, with resumption of dividends, buybacks and potentially mergers and acquisitions as companies utilise balance-sheet capacity.
  • The ASX expects that tilting your investments towards companies with high insider ownership (founders, key executives owning stakes in companies) will continue to be a good strategy.
  • The ASX prefers companies with solid balance sheets, run by managers with skin in the game, and warns against loss-making businesses in “hot” sectors that have enjoyed a substantial re-rate in 2020 on a “lower for longer” interest-rate thematic.

Read the ASX outlook for Australian shares in 2021.

Prediction #4: The global outlook

While we can be cautiously optimistic about the Australian economic outlook for 2021 - thanks to our successful management of the COVID-19 pandemic - the global news doesn’t look quite as good, with the IMF downgrading its forecasts for next year.

The International Monetary Fund has warned that we are staring down a long, slow road to recovery that will increase poverty and impact negatively on growth. They recently predicted a 5.2% increase in global output in 2021, down from 5.4% in a previous report.

Here’s some other predictions made in their report:

  • Output in advanced economies, as well as emerging markets — with the exception of China — is projected to remain below 2019 levels in 2021.
  • Global growth is expected to slow to roughly 3.5% between 2022 and 2025, leaving the output of most economies below levels that were predicted before the pandemic.
  • Worsening inequality and a decrease in living standards, both in developed economies like the United States and emerging markets like Mexico and Argentina.
  • Extreme global poverty is expected to rise for the first time in more than two decades. Almost 90 million people could fall below the $1.90 a day income threshold of extreme deprivation in 2021.

Read the IMF world economic outlook for 2021.

With lingering uncertainty around the progression of the COVID-19 pandemic and with the effectiveness of vaccine programs yet to be demonstrated, it can be difficult to predict what scenarios are facing us in 2021. The consensus is that the effects of the 2020 pandemic will take years to recover from, and our hope for 2021 is that the worst is already behind us. If you're keen to discuss your personal financial outlook for 2021, please get in touch with us.

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