Dr. Shane Oliver, chief investment strategist and chief economist at AMP, discusses the lasting effects of COVID.
Key Points
Introduction
It’s been four years since the COVID lockdowns began. The pandemic ended when it morphed into the less deadly Omicron variant in late 2021, but just as a sound can echo through a room, the effects of the pandemic continue to reverberate through economies. In addition to the long-term impacts on fitness, this report examines seven key long-term economic impacts.
#1 Rising public debt
The unrest of the 1970s gave rise to “smaller” government in the 1980s, the era of Thatcher, Reagan, Hawke and Keating. But the political pendulum began to swing toward “bigger” government after GFC and COVID gave it new impetus. Memories of the disorders related to the great state intervention in the 1970s have faded, and the concept that government is the solution to the ultimate disorders is becoming more prevalent, through regulation, taxation, spending, or school campaigns. The pandemic has strengthened aid for a “bigger” government: showing the strength of government to protect families and businesses from crises; improving perceptions of inequality; and add help to the concept that governments deserve to protect supply chains by bringing production home. Added to this is the preference of governments to elect and subsidize the “winners” of blank force.
The IMF’s projections for government spending in complex economies show that it will be about 2% of GDP above pre-COVID-19 levels. The good fortune of governments in protecting families from the worst of the pandemic has also reinforced expectations that they will do the same. Same in the next crisis. The pandemic has led to even higher public debt, as has the GFC. Although peak inflation helped reduce debt-to-GDP ratios in 2022, they are stabilizing at higher levels than before the pandemic.
Implications – While it might feel good at first, the long-term end results of “bigger” government will likely be less productive economies, lower living standards than the other side, and less unproductive. -Public Freedom. However, it will take time before this becomes apparent. At the same time, higher public debt means: less flexibility to respond to a crisis with fiscal stimulus; a greater incentive for politicians to inflate their exit; and interest bills account for a significant portion of tax revenue.
#2 Tighter Labor Markets and Faster Wage Growth
In the years leading up to the pandemic, wage expansion was low and one of the most important points was the peak of underemployment, especially evident in Australia. Post-pandemic hard-work markets contracted, reflecting the rebound in demand due to the pandemic. , lower participation rates in some countries, and some retention of hard work, as a shortage of hard work made corporations reluctant to lay off workers. As a result, wage expansion has accelerated, perhaps ending the pre-pandemic malaise of weak wage expansion.
Implications – Tighter labor markets pose the threat that wage expansion will exceed levels consistent with 2-3% inflation.
#3 Reduced Globalization/More Geopolitical Tensions
The backlash to globalization has become evident over the past decade with the Trump campaign, Brexit, and populist leaders peddling a nationalist genre while questioning the benefits of lax industry. In addition, geopolitical tensions were expanding with the relative decline of the United States and the loss of trust in liberal democracies, leading to a shift from a unipolar world ruled through the United States to a multipolar world where regional powers (Russia, Iran, Saudi Arabia, and especially China) flexed their muscles. The pandemic has exacerbated both: supply-side disruptions have increased pressure to relocate production; confrontation over the origin and control of the coronavirus; this has heightened tensions between the West and China; And this seems to have contributed to nationalism and populism. So the days of lax global industrial deals and lower defense spending seem to be long gone. Instead, we are seeing more protectionism (e. g. , with subsidies and regulations favoring local production) and increased defense spending.
Implications: Globalization is less likely to lead to lower prospective economic expansion for emerging economies and reduced productivity if source chains are controlled for non-economic reasons. And, combined with intensified geopolitical tensions leading to increased defense spending, this may simply result in a world being more prone to inflation than before.
#4 Rising Prices, Inflation, and Interest Rates
One of the main drawbacks of pandemic systems has been skyrocketing inflation. The combination of large cash printing and a sharp increase in government bills for families (e. g. Job Keeper) led to a large increase in spending once lockdowns were lifted. which, combined with disruptions in the chain of origin, also due to the pandemic, led to a sharp increase in inflation. Inflation is now starting to come under control as financial easing and increased spending have reversed and the source has stepped up again, however, the pandemic has most likely ushered in a more inflation-prone world by: strengthening the “bigger” government; as well as a reversal of globalization; and heightening geopolitical tensions. All of this, combined with an aging population, can lead to higher inflation.
Implications: Higher inflation than before the pandemic means higher interest rates than otherwise in the medium term, reducing the bullish outlook for expansion assets such as stocks and real estate.
#5 Worst Housing Affordability
At the beginning of the pandemic, it was thought that the economic slowdown, emerging unemployment and immigration freezes would cause space costs to collapse, and they fell in the first place. But not by much, as the scenario was temporarily reversed through policy measures to help the revenue stream of space reserves, allow a pause in loan payments, and reduce interest rates and loans to traditionally low points. below. In addition, confinements and escapes from home have led to an increase in demand for spaces instead of decorations and interest in smaller cities and regions. As a result, Australian space costs have reached record levels. Meanwhile, the effect of emerging interest rates over the past two years on space costs was outweighed by housing shortages as immigration stagnated. The end result is now a record high point in housing affordability for buyers (who are hit with a double whammy: higher costs relative to source of income – see chart below – and higher loan rates) and tenants (who saw rents increase).
Implications – Increased housing affordability translates into persistent intergenerational inequalities and even increased household indebtedness.
#6 Working from home is here to stay
Although there has been a return to work, for many it is only two or three days a week. Fundamentally, lockdowns have resulted in a move towards fleeing from home (WFH). A British study of more than 2,000 companies is revealing. It found that while around 90. 8% of staff were fully in the workplace in 2018, this figure had fallen to 62. 3% last year, adding 30. 2% in hybrid situations (running in place work and from home). 37% of people hired in Australia worked from home. Of course, this masks a wide range of sectors where a higher proportion of IT employees are working longer hours from home. And companies hope this will continue to be the case. There are huge benefits of running in combination physically around culture, collaboration, concept generation and learning, but there are also benefits of running from home with no travel time, with greater concentration, less damage to the environment, greater balance of life and for companies. Reduced costs, more diverse workforce and happier staff. Therefore, the concept is probably a hybrid style. The proportion of staff in a hybrid style may even increase as new corporations adopt teleworking more quickly.
Implications: Less demand for space as leases expire, resulting in higher vacancy rates/lower rents, more people living in cities as the area becomes liberated, and life revitalized in the suburbs and regions.
#7 Faster Technology Adoption
Lockdowns have particularly accelerated the transition to a virtual world. Everyone has been forced to adopt new tactics for doing things online. Many have now embraced online retail, running from home, and virtual meetings. It can be argued that this more comprehensive adoption of The Generation will unlock all prospects for improvements in the productivity of the generation. Immediate adoption of AI will most likely help.
Implications: This has resulted in faster adoption of online retail (from 7% of retail pre-pandemic to around 11%) at the expense of classic retail, with virtual meetings being the norm for many (even in the office) and business travel. at a decreasing level.
Final Thoughts
Perhaps the most significant effect is that pandemic-related stimulus measures have damaged the incredibly low inflation seen before the pandemic. Add to that bigger government and reduced globalization, and it means a world that’s more prone to inflation. So, a comeback isn’t all doom and gloom, though: apart from the faster adoption of the technology, the global and Australian economies have weathered the last four years in much better shape than they could have been. imagined at the beginning of the running of the bulls!
Ends
Important note: Although every care has been taken in the preparation of this document, neither National Mutual Funds Management Ltd (ABN 32 006 787 720, AFSL 234652) (NMFM), AMP Limited ABN 49 079 354 519 nor any another member of the AMP. Group (AMP) does not represent or guarantee the accuracy or completeness of anything contained therein, including, but not limited to, any predictions. Past functionality is not a reliable indicator of long-term functionality. This material has been prepared with the objective of offering general information, without taking into account the specific objectives, monetary situation or wishes of any investor. An investor should, before making any investment decision, consider the suitability of the data contained herein and seek professional advice, taking into account his or her objectives, monetary situation and wishes. This document is intended solely for the use of the party to whom it is provided. This curtain is not intended for distribution or use in any jurisdiction where doing so would be contrary to applicable laws, regulations or rules and does not constitute a recommendation, offer, solicitation or invitation to invest.
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