The Australian economy has weathered the health crisis of 2020, and is showing signs of rebounding that has exceeded the expectations of many.
In a recent address by the RBA to the National Press Club, Governor Philip Lowe made several observations:
- Australians respond well in crises
- The economic downturn was not as deep as initially feared
- The bounce-back has been earlier and stronger than what was expected
For example, in August 2020 the RBA forecasted the unemployment rate at the end of 2020 would be close to 10%, but instead, the unemployment rate was 6.6% by December 2020 (and by January 2021 the rate had dropped further to 6.4%).
The RBA now forecasts that the unemployment rate will drop to 6.0% by the end of 2021, and 5.5% by the end of 2022.
This better-than-expected result has been attributed to a number of factors, including the success in containing the virus. Comparing the situation in Australia to that of many countries overseas, it is clear that the health of the population and the health of the economy are closely linked.
Another factor, highlighted by the RBA, was the way in which Australians adapted and innovated throughout 2020. Businesses changed their business models, introduced new technologies, and moved online. Households changed their spending patterns as well, redirecting their spending from travel and entertainment to electronics, homewares, and home renovations.
Online spending surged by 70% over 2020 which provided a significant boost to the overall economy.
This optimism is reflected in the consumer sentiment by the Westpac-Melbourne Institute, which by December 2020 had fully recovered from the COVID recession.
By the end of 2020, this index stood 48% above the low in April 2020, reaching its highest level since October 2010 and recording a 10-year high.
This index highlights the difference between this recession and the global financial crisis of 2008-2009. While the index reached comparable lows in both cases, the recovery in sentiment in the COVID recession has been much more rapid – fully recovering after only 8 months. By comparison, in the following 8 months after the low in the GFC, the index had only recovered 8.4.%
Despite the positive signs in recent months, the RBA suggests that we still have quite a way to go before they reach their goal of full employment and complete economic recovery.
The RBA’s central scenario is for the rebound in the economy to continue with above-trend growth over the next few years, with GDP expected to increase by 3.5% over 2021 and 2022.
At this rate of recovery, the GDP will return to its end-2019 level by mid-2021 (which is 6 to 12 months earlier than the RBA previously expected).
Another key driver of the economic recovery is the housing market, as the national economy and the housing market are inextricably linked. In the RBA Governor’s comments earlier this month, he said “sustainable increases in asset prices support household balance sheets and encourage spending through positive wealth effects. Higher housing prices can also encourage additional residential construction”.
In other words, the RBA believes that rising house prices are a good thing for the economy, and is part of the recovery plan.
In the RBA meeting earlier this month, the Board decided to maintain interest rates at 0.1%, with the guidance that this record low rate will be maintained until 2024 at the earliest.
This substantial period of low-interest rates will likely put upward pressure on house prices over this period. Documents released by the RBA earlier this year reveal that house prices can be pushed up if interest rates remain low for years, with one scenario showing a 30% increase in prices over 3 years after a 1% cut in the interest rate.
With the interest rate at 0.1%, (reduced by 1.4 percentage points in less than 2 years), which is likely to remain until 2024, the housing market looks to be set for a period of sustained price growth moving forward.
Many property investors are already seeing significant profit throughout many regions across Australia. As the economic rebound sets to continue at a growing pace, it makes sense to partner with a leading property investment team that will tailor a strategy to suit your individual goals. Whilst our research supports the latest surge in media coverage of positive growth in Australia, it’s important to note that this won’t be the case in all regions.
Attend one of our Free Online Masterclasses to learn about how to identify these areas, spot red flags, reduce your income tax, wipe away your mortgage as well as how to maximise on property investment strategies to become financially free in the next 7-15 years.
Source link: 1