04/12/2020 - 14:00

Economy on the verge of a V

04/12/2020 - 14:00


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The global economy could be enjoying a burst of strong expansion within six months.

Households are ready to spend after months of social restrictions. Photo: Stockphoto

Not many people have enjoyed the ride in 2020, but it appears that at least one contentious issue has been resolved. 

We now know the shape of the economic recovery. It’s not a W, or an L; it is definitely a V, and a big V at that.

Positive vaccine news layered on top of rampant government stimulus spending, and households prepped to unleash a blizzard of spending after 10 months cooped up, could make 2021 one of the best years in decades.

Until a few weeks ago, the recovery shape was a hot topic among economists debating whether it would be a double-dip downturn, which would look like a W on a graph of economic growth, or a long period of stagnation, the dreaded L shape.

There was also talk of a U shape, with a flat period before an uptick, and a ‘swoosh’ shape like a Nike logo (which is what the V being talked about could become if the outlook is as good as some experts believe).

However, today’s consensus view is for a V-shaped recovery after the smothering lockdowns earlier this year. And despite ongoing COVID-19 problems in Europe and the US, it appears business and consumers have learned how to survive the virus crisis.

Winter in the Northern Hemisphere will stifle optimism for a few more months, but by March (or perhaps a bit sooner) the world should be enjoying a globally synchronised burst of strong expansion.

Some of the smartest people in business are starting to get excited about 2021, including the chief executive of National Australia Bank, Ross McEwan, and high-profile US fund manager Bill Ackman.

Mr McEwan sees an economic boom in Australia next year, given the way COVID-19 has been handled and the lifestyle factors that make this country such a great place to live.

Mr Ackman has more of a global view, with the powerful effect of ultra-low interest rates motivating investors and homebuyers.

“You’ve got low rates, you’ve got stimulus, you could see infrastructure spending and you’ve still got well-capitalised banks, which means you have access to capital,” Mr Ackman told a recent investment conference.

Trigger points to mark the start of the 2021 boom include the official handover of power in the US on January 20, and the first public inoculations against COVID-19 using one of several promising vaccines.

Investment banks are warming to the idea of next year and perhaps 2022 being periods of rapid growth, although the near certainty of rising interest rates as the boom gathers pace may catch some unaware.

Macquarie Bank, in typical economist jargon, said one of the ‘risks’ in the stock market today was the potential for ‘stronger-than-expected’ upgrades in earnings, as well as rising bond yields.

Wow, some risk. What Macquarie is signalling is higher share prices and a return to reasonable interest rates on savings. Only a banker would see those developments as risks.

Morgan Stanley, in what is perhaps the most unashamedly upbeat forecast for next year, said the global economy was already back to pre-COVID-19 levels, having staged a powerful recovery since the low point in May.

By Christmas, the world will probably be in better shape than it was before the pandemic.

“We see global growth accelerating to 6.4 per cent in 2021 versus banking industry consensus of 5.4 per cent,” Morgan Stanley said, listing three reasons why it was more optimistic than its rivals.

Firstly, there is the prospect of a global synchronised recovery, both geographically and in multiple sectors of the economy, with the start point being March-April.

“Driving this synchronised recovery will be a more expansive reopening of the global economy and the effect of extraordinary monetary and fiscal stimulus,” the bank said.

The second factor was evidence that emerging markets, hit hardest by the COVID-19 lockdowns, were ‘boarding the growth train’, while the third factor was the prospect of rising inflation in the US with accompanying wage rises and falling unemployment.

Dead-end debt

Not every business is going to do well in 2021, with first cracks appearing in the ridiculously popular second-tier finance sector known as ‘buy now pay later’ (BNPL): a long-winded description for easy credit for people who can least afford it.

According to the latest survey of the embryonic BNPL sector, an estimated 20 per cent of users have already fallen behind in their payments, which means they have started an escalator ride to poverty and a knock on the door from a debt collector.

There is absolutely nothing new in BNPL, it is just another hook to catch the unwary by dangling the dream of instant access to goods and services without fully understanding the debt repayment consequences.

BNPL is sub-prime lending by another name and a disaster waiting to happen.


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