Economics in the 2020s — where do we go from here?
As house and share prices climb to high levels, can markets safely discount the prospect of future
corrections?
It is proper inaneconomic review of 2020, first to give credit where credit is due. Theworld economybegan 2020 in aweak state, with low interest rates sustainingweak growth. Then, inthe first quarter of 2020, Covid-19 delivered severe economic shocks to this fragile position.
Stock markets tanked. Negative economicpredictions appeared. The Uscorporatebond market stalled. The world appeared headed for a significant and lengthy economic downturn.
In mid-march 2020, theus Federal Reserve injected US$1.5 trillion into the Useconomy. Major cash injections followed from most other central banks. Governmentsurgently began largedeficit spending.
Nine months later, as 2020 ends, the worldeconomyappears ontheup again. These huge doses of monetary and fiscal stimulus successfully kept the worldeconomyfrom falling into the abyss.
Credit is due to economic policymakers. Although real economies remain patchy, markets are surprisingly improvedat year-end, thanks to their efforts. Against the odds, policymakers appear to be winning the very testing Covid economic battle of 2020.
Whathas been the cost of this Covid battle? Will world economies finally also win the war?
Like prettymuchall of life, it is rare to have straight gains fromeconomic policies. Major economic interventions almost always also have downsides— insomecasesdelayed.
Incomedrops for retirees and fixed interest-earners; super funds and institutional savers struggling to achieve appropriate returns; zombie companies kept afloat; inflated housing, sharemarket andasset prices; and greater debt right around the world (private, public and central banks) are immediate consequences. Impacts have been very sectorspecific: tourism, overseas students, restaurants have been hurt; IT has benefited.
Longer term, traditional economic theory says increases inthe moneysupply cause inflation— an effect which has been surprisingly absent since2008 whenthese policies first began.
Whatcanwesay about world economies in 2021 and beyond? First, it is likely they will continue to improve over the next year or more, as vaccines (hopefully) suppress Covid, borders reopen and people enjoy an initial burst of travelling again.
Thensomenegativesmaybegin to appear. Major economic interventions avoid downturns but appear also to slow recovery. After 2008, world economies were only able to growat all so long as interest rates remained at ultra-low levels. Japanhad a similar experiencewhenit implemented the policies earlier.
With the majornew interventions of 2020, this effectmayamplify. So after the initial postCovid and border-opening bounce, stagnant economies rather than strongly growing ones have to be a risk later into the 2020s.
Yes, 2020has shownthatmodern economic policies can moderate this cycle— but can they eliminate it for the future?
As house and shareprices climb to high levels, can markets safely discount the prospect of future corrections? The jury surely is still out onwhether significant economic downturns are truly a thing of the past.
Inflation also has to be considered. Is it correctly calculatedwhen inflation figures fail to reflect rising house and shareprices? However it is calculated, logic suggests it should be rekindled by themassivemonetary injections since 2008and especially in 2020. If it does reappear, it will forceup interest rates — which will hurthomeownersand impede economic growth. But so far, it is surprisingly quiescent.
Finally, there is debt. Governments andhomeownersare loadingupon it while interest rates are low. Again history suggests toomuchdebt will ultimately cause trouble— a possibility that is not yet slowing borrowers. So yes, the economic bounceback after Covid should continue and even accelerate into 2021. But thereafter, whenthe economic sugar rush of the 2020 stimulation ends, concern has to remain.
Excessive debt, the return of inflation, stagnant growth, a return of the business cycle, are all potential long-term future risks. The world would bewise to remind itself that success in the 2020 Covid economic battle is noguarantee of victory in the economic war of 2021 and beyond.