‘Bizarre’ year: Economy and markets in 2020

A year is a long time in economics.

When 2020 kicked off, there was a hint of optimism about the outlook for the Australian economy. Sure, the rate of economic growth was still sluggish, the unemployment rate was above 5 per cent and inflation and wages growth were low and falling, but the leading indicators were pointing to a better outlook.

Housing was also bouncing back and the export sector was providing a boost as international trade surpluses grew and export volumes rose.

For markets, the ASX had been moving higher and indeed, in February it hit a fresh record high of 7,160 points. The Aussie dollar was hovering around US70 cents and the RBA had the cash rate at 0.75 per cent but was open to the idea of a further interest rate cut if inflation remained weak.

The Morrison government was claiming (somewhat optimistically) that the budget would be returning to surplus and that government debt would start to fall.

Things changed with the coronavirus

Then came the recession.

With the coronavirus lockdowns, the economy experienced its sharpest slump since the 1930s Great Depression, with GDP falling 7.3 per cent in the first half of the year.

The labour underutilisation rate (unemployment plus underemployment) surged to reach a peak above 20 per cent.

Inflation fell, wages growth slumped to a new record low and the stock market was crunched dropping 40 per cent in the space of a few weeks.

The Aussie dollar fell around 15 US cents, and the Reserve Bank moved to cut interest rates and implement a form of quantitative easing.

The government reacted with a range of fiscal policy measures, aimed at supporting economic activity, cushioning the deterioration in the labour market and helping otherwise imperilled businesses survive. Talk of a budget surplus went the way of the Dodo and the 2020-21 budget deficit is poised to be around $200 billion or 10 per cent of GDP.

From around the middle of the year, it became apparent that Australia has done very well containing the coronavirus. As a result, many parts of the economy reopened and with that, the economy rebounded strongly with GDP and employment rising in the second half of the year. This was even with the slippage due to the coronavirus outbreak in Victoria which saw widespread lockdowns throughout that state.

In other words, as the country opened up and restrictions were relaxed, the economy recovered.

As 2020 draws to an end, the ASX is only a fraction down on where it ended 2019. The Aussie dollar is around 5 US cents higher and the RBA cut the cash rate to 0.1 per cent. All up, things in financial markets are not materially different despite the swings and roundabouts within the year.

When the December quarter GDP data are eventually released, it is likely that the economy was around 1.5 per cent smaller through 2020, the unemployment rate is around 1.75 percentage points higher than at the end of 2019 while inflation and wages growth are both sharply lower.

This was a bad year for the economy.

2021 – a calmer year?

While conditions look positive for the economy in 2021, there are a myriad of risks not least is the possibility of domestic and international economic effects from the coronavirus. A successful roll out of the vaccination would be great news for the economy as it would allow for international borders to open.

Then there is Australia’s fragile relationship with China on trade and strategic issues. If these tensions escalate, the Australian economy will be vulnerable to a negative export shock which would drag the economy lower. China has the bulk of the economic power in this trade relationship and small changes for it, are huge changes for Australia.

There is a strong likelihood the Federal election will be held in the latter part of 2021, an event that could see a tough fight on policy as both sides strive to get voter support.

Then there are the unknowns. And, by definition, who knows what they might be?

It is to be hoped the economy grows solidly in 2021 and the shock events are positive rather than the drag on the economy, business investment and jobs.

Want to hear Australian influencers reveal their best finance tips? Join the Broke Millennials Club on Facebook, and receive one hot tip per day in December.

And if you want 2021 to be your best (financial) year yet, follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter. Subscribe to the free Fully Briefed daily newsletter here.