As the COVID-19 pandemic rages on particularly in Europe and the US, which have seen another resurgence of cases, more attention is being given to the pandemic’s lasting effects.
AMP Capital chief economist Dr Shane Oliver has identified a number of impacts, in the medium to long term, that may continue to weigh down investors.
“The magnitude of the coronavirus shock means it will have implications beyond those associated with its short-term economic disruption,” he said.
“Possibly a bit like a world war – where the post war period is very different to the pre-war period.”
Dr Oliver noted that the pandemic had sparked support for more involved government intervention, while also lifting people’s tolerance to high levels of public debt.
Governments are now expected to take further action to help boost infrastructure spending and bring back local production of key goods.
“While increased infrastructure spending is positive for productivity, the trend towards bigger government generally is more of a negative for longer term growth,” said Dr Oliver.
Quantitative easing combined with government support for households and businesses had increased broad money supply measures above their long-term trends, with excess household savings climbing to $180 billion in Australia and US$2.3 trillion in the US.
“The pool of excess savings provides a boost to spending and a potential disincentive to work (until it runs out) and with increased money supply risks an ongoing boost to inflation, beyond the pandemic-driven boost currently being seen,” said Dr Oliver.
Geopolitical tensions and the backlash against globalisation, which have been stoked further by the pandemic, also pose risks to growth.
Changes in technology and employment
Some of the most obvious impacts will stem from the accelerated adoption of technology, Dr Oliver said.
The surge of online shopping is expected to put significant pressure on traditional retail, while the anticipated continuance of work from home could have major implications for offices and CBDs, and virtual meetings could dampen demand for business travel.
“It may be argued that this fuller embrace of technology beyond Netflix will enable the full productivity enhancing potential of technology to be unleashed,” added Dr Oliver.
Shifting perspectives about work have also led to the “Great Resignation”, particularly in the United States where employees are leaving their jobs at record levels.
While job turnover remains normal in Australia, the lack of skilled immigrants and backpackers has impacted labour supply, which will likely take some time to return to pre-pandemic levels.
By 2026, Australia’s population is expected to be one million people smaller, compared to forecasts made prior to the pandemic, on the back of low immigration.
“The hit to immigration if sustained could mean a more balanced housing market in the years ahead with less upwards pressure on prices and reduced potential growth in the economy as a result of skilled shortages and lower population growth,” said Dr Oliver.
A re-run of the “roaring twenties” is on the cards at the eventual end of the pandemic, according to Dr Oliver, with pent-up demand, excess savings and technology-driven productivity improvements potentially leading to stronger than expected growth.
However, the biggest risk remains high inflation.
“Just as World War II and expansionary post-war policy ultimately broke the back of 1930s deflation, so too the pandemic and its monetary and fiscal response is likely to have broken the back of the prior disinflationary period,” said Dr Oliver.
“This in turn means the tailwind of falling inflation and interest rates which provided a positive reflation and revaluation boost to growth assets is likely behind us.”
