2020 has been a very challenging year for many. We have all been affected in some way by COVID 19, and the economy certainly took a hit. The rebound in economic activity and worldwide share markets has been strong, unexpectedly so for some. The question now remains, is this a temporary rebound or are we again going to experience a fall off the financial cliff?
We could write an article with numerous arguments as to why we face very challenging economic times ahead, but as we approach Christmas and the end of 2020, we choose to look at the positives and suggest why the Australian economy will continue to surge ahead.
- The official cash rate is currently 0.10%. Home and business loans are at all-time lows. Businesses can now borrow for less than 4% p.a, if secured by a residential property. This provides support for businesses to grow or diversify, which in turn is stimulating the economy. The Reserve Bank of Australia (RBA) has stated it does not expect to increase interest rates for at least three years, providing peace of mind.
- The home loan market has shown no real signs of a crash during these difficult times. If anything, the markets in regional and rural Australia are very strong, including Alexandra. The availability of cheap money and ‘the fear of missing out’ should continue to propel the market. Existing homeowners, with a feeling of increased wealth, are more likely to spend sparking economic activity, exactly what the government wants.
- The early forecasts of the Gross Domestic Product (GDP) growth and the unemployment rate were worse than what is now expected. Basically, the economy did not suffer as bad as what was first thought across the peak of the pandemic. There is no doubt that the various government stimulus packages have supported this outcome. The governments (both federal and state) have had to borrow significantly, but in this long-term low rate environment, there has never been a better time to borrow.
There is a legitimate, common concern that the debt being taken on by our government will cause significant economic pain in the future. This would primarily occur if the government had to increase taxes and reduce spending to meet its debt obligations. The government is basing its recovery and growth strategy on encouraging economic activity, by spending and promoting lending at long-term low rates. This will generate activity and increased taxation review, enabling its debts to be managed and reduced over time.
There are consequences expected, such as low wage growth and for investors who prefer to only invest in cash. This means it is important to regularly assess and review your investment strategy, incorporating a diversified portfolio with exposure to all the major asset classes. This may help achieve consistent returns.
We cannot deny that there are risks prevalent in Australia and worldwide. The key to the sustained recovery and growth is the success of a vaccine. Early signs are good, and this will help harness consumer confidence and so further spending. We are in for an interesting ride, but with confidence and optimism, and a little bit of luck, there may be better times ahead. General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.
~ Dean Murdoch