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Monday, 7 December 2020

Australia on the brink of Roaring Twenties?

Ripper rebound?

My sometime Wimbledon-based luncheon partner and fellow Noosaphile James Aitken was reported in the AFR today, noting the counter-intuitive possibility of a European summer boomtime as pent-up post-vaccinated demand is unleashed. 

Unlike in the period after the financial crisis, fiscal stimulus should not be snapped off too soon, and a powerful combination with monetary policy could drive the reflation trade. 

Now consider the Vitamin D-laden borderline miracle that is Australia, which has seen many of its key cities go for months with barely a whiff of a COVID case, yet is running a Budget deficit to the tune of $214 billion or more than 7 percent of GDP, alongside zero interest rates and quantitative easing. 

Could we see the economy come booming back over the next couple of years?

The iron ore rally is on the verge of becoming unhinged, with inventory drawdowns underway and the spot price mooning another 5.8 per cent higher to a fresh 6-year high of $145.01/tonne at the Friday close, thus cementing Western Australia's long-awaited economic recovery. 

The spot price has now soared by 279 per cent from its December 2015 nadir, and the strength in demand from China for this time of year is something we simply haven't witnessed before. 

Monthly new car sales have come soaring back since August as the Aussie economy has reopened.

Source: FCAI

There's also been a bumper grain crop this year, and even stock prices have soared. 

Eastern states have a people problem

Meanwhile back on the east coast the unemployment rate in New South Wales looks is set to wrap up 2020 at about 6½ per cent, which is the lowest of the states and the sort of number that we could only have dared to dream of back in May. 

With RBA Governor Lowe finally indicating that the policy of leaning against the wind to dampen credit and asset prices due to financial instability concerns - while running an output gap - has finally been shelved, it's likely to be a strong three years ahead for Sydney's housing market, with Melbourne also recording some strong results over the past week. 

Source: CoreLogic

Residential construction looks set to run strong for a couple of years thanks to the government's stimulus success.

It's a point that's been made here before, but the missing piece of the puzzle for Australia's eastern states will be the ability or otherwise to shed the virus paranoia and open the international borders. 

Tourism, students, and new migrants have been the lifeblood of growth for Sydney and Melbourne over the past decade, and without them the recovery is more likely to stutter.