While the impact of the coronavirus has dominated news coverage, there are a mix of positive and negative potential long term implications. Some will depend on your perspective as to whether they are good or bad with economic impacts and changes to our lifestyle and the way we do certain things.
1. Interest rates are likely to be lower for longer, potentially for several years. Economic activity will likely be low until 2022, with high unemployment and low inflation or even deflationary pressure. The RBA is targeting a 3-year bond yield of 0.25% and offering banks low-cost funding at the same rate.
2. Globalisation may be slowed or reversed to some degree as countries close borders, travel reduces and local supply is encouraged with a reduction in reliance on China.
3. The US China trade war from 2018 and 2019 may ramp up again. China is behind in it’s agreed purchase of goods from the US, and Trump is looking for a scapegoat for his poor handling of the crisis. This could be negative for growth, multinationals and Australia, although the impact may be minor as most Australian exports to China are for domestic use.
4. Higher public debt and bigger government with more intervention in economies. There may be increased perceptions of inequality between white collar workers able to work from home and lower paid workers being stood down or continuing to work in unsafe conditions.
5. Higher inflation in the long term – perhaps to 4% or more due to rising public debt, money printing and more protectionism, although inflation is likely low for the next coupe of year.
6. Continuing consumer and investor caution which was caused by the GFC. Australians are more focused on bank deposits and paying down debt, with a scepticism of shares. There may also be more aware consumers questioning the need for purchases, although this is likely only in the short term. This will effect discretionary retailers, banks and wealth managers.
7. Self isolation has increased the use of digital technology with an increase in online shopping, remote working and virtual meetings. This may impact traditional retail, office space, a shift from cities to suburbs and regions, reduction in peak hour congestion, less business travel and increased online activity.
8. Airlines will continue to struggle and be slow to recover with less business travel and cautious tourists.
9. Further pressure on the Eurozone which may break up, although this is unlikely as they are currently working together and a number of countries including Germany benefit from the EU.
10. With travel bans in Australia there will be lower immigration which effects home building and prices due to an underlying dwelling demand drop of 80,000 per annum.
Economic growth is likely to be constrained with lower potential investor returns through factors such as consumer caution and lower inflation. The embrace of technology should boost productivity and lower interest rates are positive for growth assets. Look for the positives, and keep washing your hands.
Please see the full article for more of Shane Oliver’s thoughts.
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About the Author
Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.
Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.