Economy to recover from weakest year since WWII

The global economy is expected to recover in 2021 following the weakest year since World War II, with fiscal and monetary policy continuing to support world economies, a big four bank has forecasted.

The Commonwealth Bank of Australia’s (CBA) chief economist Stephen Halmarick has outlined his economic predictions for 2021, with global growth forecasted at 5.2 per cent off the back of strong growth in the US and China.

“In the US, there remains a number of political risks ahead. But, assuming Joe Biden is sworn in as the 46th President of the United States on 20 January 2021, we expect him to focus on a few key policy priorities that should support the US economy throughout 2021 and beyond,” Mr Halmarick said.

The economist also highlighted how despite economic falls in Australia, a win on the health front so far has led to a less severe downturn than first predicted. 

“Australia has done a better job than just about any other nation in controlling the spread of the virus,” Mr Halmarick said. 

“This, combined with fiscal and monetary policy support being provided to the economy, and the role played by the Australian banking system, means the economic impact of COVID 19 has been less severe in Australia than many other nations, and less severe than initially expected.

“To be sure, Australia’s 30-year run without a recession has come to an end, and the human toll of the sharp rise in the unemployment rate has been very real. But, the outlook for Australia is improving.”

Expect rates to be lower for longer

Despite a stronger economy predicted in 2021, Mr Halmarick said the consequences of the current pandemic are likely to have an impact on monetary policy in the medium-term.

“The recession, the rise in the unemployment rate, the global economic environment, and the expectation that inflation will remain below the 2 to 3 per cent target range for years, has seen monetary policy in Australia enter unconventional space for the very first time,” he said.

He pointed out the cash rate target is expected to remain at just 0.1 per cent for at least three years. The RBA is funding the banking system for three years at 0.1 per cent, and the RBA is targeting the three-year Commonwealth bond yield at 0.1 per cent. 

In addition, the RBA is now engaged in a quantitative easing (QE) program and will buy $100 billion of Commonwealth and state government bonds over the six months to April 2021. 

“Having entered the world of unconventional monetary policy, it is going to be a long time before the RBA can retreat from providing significant support to the economy,” he said.

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Article reproduced from Nest Egg by Cameron Micallef

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