GDP to regain lost ground in 2021: report

Global wealth manager Credit Suisse has released its Investment Outlook 2021 report, in which it has projected that Australia could recover most of the gross domestic product (GDP) lost during 2020 due to the economic impacts of coronavirus pandemic, but not all.

While noting that Australia has remained relatively resilient among developed nations, the wealth manager said that it expects GDP to recover by 5 per cent in 2021, after a decline of 6 per cent in 2020.

Despite forecasting this recovery in growth, analysts do not expect to see inflation reaching the Reserve Bank of Australia’s (RBA) desired band of 2 per cent to 3 per cent.

Australia’s inflation is predicted to rise from 0.4 per cent in 2020 to 1.5 per cent in 2021, the report said.

Therefore, the RBA is likely to leave the official cash rate at its current record low level of 0.10 per cent, according to the report.

Commenting on the outlook for 2021, Credit Suisse chief investment officer Australia, Andrew McAuley said: “COVID-19 has been contained, but it will take some time for overseas tourists and international students to return to Australia. Even so, the federal and state governments and the RBA have shown a determination to ensure the national economy stays on a recovery track.”

Globally, the wealth manager expects that the COVID-19 pandemic will continue to impact the economy and financial markets in the months ahead.

The global economy is expected to grow by 4.1 per cent in 2021, as demand continues to recover following the 2020 recession, while global inflation of 2.3 per cent is expected in 2021, which is lower than the pre-pandemic level of 2.5 per cent in 2019.

While the effects of the pandemic are expected to rein in inflation in 2021, the report warned that the long-term consequences of the crisis on inflation are less clear.

The report said: “Over time, ballooning budget deficits and public debt are likely. This destabilisation of public finances can lead to inflation, but only if central banks are ineffective or inactive in responding to future inflation pressure.

“This could happen, for example, if central banks succumb to outside pressures or if they begin to allow concerns over government debt service to influence their rate decisions. This is a risk case for the post-COVID-19 period.

“We cannot exclude the possibility that central banks are pressured into financing overly ambitious fiscal programs.”

The wealth manager observed in its report that central banks have become more open and willing to adopt “unorthodox” monetary policy measures such as quantitative easing, negative interest rates or yield curve to control or avoid deflation than to tighten monetary policy in the face of rising inflation when the economy is weak.

“This puts central banks in a delicate position to fulfill their mandates. For now, it is too early to assess such tail risks, but investors should stay attentive to the sustainability of public finances,” the report said.

Low chance of more stimulus

While governments around the world implemented fiscal stimulus amounting to 10 per cent or more of GDP during the COVID-19 crisis, Credit Suisse does not expect additional stimulus of that size in 2021.

This is due to the expected recovery of the world economy and the low probability of further COVID-19 lockdowns.

Regardless of this, and the trajectory of the global economy, the report warned that high government debt will remain a challenge for policymakers moving forward.

“So long as interest rates remain at or close to their current lows, debt will remain sustainable,” the report said.

“However, governments will be constrained in fighting any future recession and, more importantly, financing growth-enhancing expenditures. High debt is thus likely to be one of the lasting burdensome legacies of COVID-19.”

[Related: Economy poised for ‘sustainable’ recovery: Moody’s]