The global recovery is now underway, but a number of key risks threaten to derail it.
While suppression and social distancing measures have been a resounding success in the countries that enacted them, there is still a chance that reopening economies could see a resurgence in cases.
“If we see a second wave of coronavirus cases start to spread, either in Australia or internationally, that could dent both consumer and business confidence if governments had to re-enact the suppression methods that we’ve seen to date,” said Anthony Doyle, cross-asset specialist at Fidelity.
While the Australian healthcare system is well positioned to deal with a second wave of infections, that’s not true in the US, where some states are already reopening. Emerging markets like Russia, Brazil and India also haven’t seen a peak in infections – and with a vaccine some 12-18 months away, it’s likely that the coronavirus will continue to impact those economies for some time.
While Australia is well positioned for the recovery due to its quick enactment of social distancing policies and its close economic alignment with China and Asia at large, travel bans are still likely to hinder the rebound.
“Our growth rate of population has supported economic growth over the last 30 years,” Mr Doyle said. “That will now act as a headwind as we don’t have the migration levels we historically enjoyed in Australia.”
Mr Doyle also believes that the rally in equity markets is “hope-based” rather than “evidence-based”, with the full impact of earnings downgrades and dividend cuts, as well as revelations about the “true health” of company balance sheets, likely to bite investor sentiment.
“This could shock the investment community and we might see further declines in equity markets from where we stand today,” Mr Doyle said. “When we see the very bad news start to be printed in terms of the real economy, labour markets, potentially disinflation or deflation, that will also be very bearish for risk sentiment as well.”
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