An old English saying relating to March, the first month of spring in the northern hemisphere, is “in like a lion and out like a lamb.” Early spring is often stormy, wintery, and bleak in England but gives way miraculously to new growth in the countryside and often calm, blue skies and warm sunshine. The idiom for March in England could be applied to 2021 for much of the global economy, including Australia. After a bleak start to the year caused by the resurgent virus in the closing months of 2020 and renewed containment measures crimping economic activity the year looks set to improve from late Q1.
The boosts to the global and Australian economies later in Q1 come from two sources. The first is the roll-out of vaccinations that while taking time to limit covid-19 outbreaks will prevent reoccurrence of the surge in cases that shattered the northern hemisphere winter months. Greater vaccination numbers through the northern hemisphere spring months together with a change to warmer weather conditions limiting- the spread of covid-19 means that infection numbers will fall sharply. Restrictions will ease and importantly they will not be re-imposed other than in localised and much less draconian form.
From late Q1 and in Q2 households and businesses in the US, Europe and Asia will be able to plan and spend more confidently than has been possible through 2020.
The second source of support for global and Australian economic activity later in 2021 comes from the massive increases in government spending during 2020 plus already legislated stimulus for 2021 and more spending yet to be announced.
The latest trillion-dollar income support measures in the US involving $US600 cheques in the post and higher unemployment benefits were legislated just before New Year. That income support is starting to flow early in 2021. More stimulus will come after the Democrats won the run-off Senate seat elections in Georgia giving them a clean sweep of the presidency and both houses of Congress. Stimulus spending combined with rapidly reducing covid-19 infection numbers in the spring and summer months point to rapid growth in US Q2 and Q3 GDP. That rapid growth will be after negative GDP growth in Q4 GDP (advance report due late January) and tepid growth in Q1.
A similar GDP growth trajectory to the US is expected in Europe as well. High covid-19 infection rates and renewed restrictions caused GDP to fall in Q4 and in Q1 as well. The rapid reduction in the number of covid-19 infection numbers in the approaching spring and summer plus the 1.6 trillion-euro fiscal stimulus plan legislated late last year promise a rapid improvement in GDP growth in Q2 and Q3.
In Australia, the limited return of covid-19 infections in December and success containing the outbreaks means that restrictions imposed will be short-lived. The damage to Australian GDP growth is limited to the closing days of Q4 2020 and early Q1 2021. The damage will not prevent robust Q4 GDP growth. Housing activity and retail sales rose sharply in October and November and December remained strong on anecdotal reports.
After a soft start in January economic activity will lift in February and March. The Government’s income support programs are tapering in Q1, but earlier higher rate payments boosted household savings mostly because covid-19 restrictions limited the ability of households to spend. The household sector built up a savings war chest during covid-19 restrictions and can spend. Stronger household spending should deliver positive GDP growth in Q4 2020 and in Q1 2021. Australia will be a rare exception to the negative GDP growth rates in the US and Europe in Q4.
While Australia will not share the weakness in global GDP growth in Q4 2020 or Q1 2021, it should share the global strengthening of GDP growth in Q2 and Q3. Australian vaccinations will start in February and together with Australia’s proven ability to keep low covid-19 infections mean that Australians will be confident that reoccurrence of late-2020/ early 2021 restrictions is unlikely.
Another factor supporting a period of Australian economic out-performance is that Australian policymakers are taking no chances with the economic outlook. Any set-back is met by announcement of more government spending. The Australian Federal Government can and will spend more when needed because of low net government debt by international comparison. The RBA has also committed to help government borrowing to fund more spending meaning government borrowing costs are low.
2021 is in like a lion but will go out like a lamb. Powerful forces including the rapidly fading pandemic in the northern spring and summer and record high government spending point to a period of rapid GDP growth in our view, especially in Q2 and Q3.