Green shoots of economic recovery?

After two years of uncertainty and households battening down the hatches, 2022 offers some hope of a recovery. The asset markets have been watching interest rates closely reacting to any news or rumour about the beginning of the end of decades of cheap money. While this may be true, the historic first step down the QE path by the RBA almost certainly signifies a turning point in Australian monetary policy.

It will be hard to see how they won’t pull that trigger again come the next economic crisis – whether the constant meddling in the economy will prove to be a good thing in the long run compared to allowing a Darwinian process of creative destruction to take place remains to be seen. Either way we can only play the hand we’ve been given.

One of the unexpected outcomes from the pandemic and the seemingly never-ending lockdowns was that people were forced to save their earnings. In fact, there’s around $260 billion in excess savings or around 17% of all earnings during the pandemic. This is around triple the annual pre-pandemic savings rate.

This was likely due to combination of uncertainty about the future along with the fact that people just had greatly reduced opportunities to spend their money during lockdown. This is a useful buffer for the economy and as confidence returns we can expect these savings to be spent, increasing the velocity of money and aiding the recovery.

In addition, the number of borrowers struggling to repay their loans has also been remarkably low with the banks provisions for bad loans falling significantly compared to this time last year. With unemployment rates at 4.3% there has been upwards pressure on wages as well. This is expected to last for some time as migrant workers slowly get the confidence to begin travelling again and return to our shores.

The CBD’s which have been hit the hardest by the pandemic will also begin to see some signs of life as workers begin to return to offices over the next month or two. This should help the struggling cafes and retailers in the area – some who have been hanging in there by the skin of their teeth.

It seems one of the silver linings of COVID-19 is it has left many households in a stronger financial position than before the pandemic. For now it seems like there has been a shift in sentiment and some hope out of this situation. We’ve effectively had a two-year test run of working from home. It’s likely that in many industries working from home at least for a few days a week will now become a welcome permanent feature but a partial return to normality would definitely be a relief.

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