It has been four years since the COVID lockdowns began, and while the pandemic may have ended with the emergence of the Omicron variant, its effects continue to reverberate in economies around the world. Dr Shane Oliver, Head of Investment Strategy & Chief Economist at AMP, discusses seven key lasting impacts from the Coronavirus pandemic that are shaping our world today.
1. Bigger Government and More Public Debt
The pandemic has given a push towards “bigger” government, with rising support for the idea that government is the solution to most problems. The success of governments in protecting households and businesses from shocks during the pandemic has reinforced expectations that they will do the same in future crises. This has led to an increase in government spending and public debt, which may have long-term consequences for economies, including less productivity, lower living standards, and reduced personal freedom.
2. Tighter Labor Markets and Faster Wage Growth
Labor markets have tightened post-pandemic due to increased demand and labor shortages. This has led to faster wage growth, potentially breaking the pre-pandemic trend of weak wages growth. While this may initially be seen as positive, there is a risk that wages growth exceeds levels consistent with inflation, leading to potential economic imbalances.
3. Reduced Globalization and Increased Geopolitical Tensions
The pandemic has fueled a backlash against globalization, with increased support for protectionism and a shift from a unipolar world dominated by the US to a multipolar world. Geopolitical tensions have risen, particularly between the West and China. These developments pose risks to potential economic growth and productivity and could result in a more inflation-prone world.
4. Higher Prices, Inflation, and Interest Rates
One of the downsides of the pandemic support programs has been the surge in inflation. Massive money printing and increased government payments to households, combined with supply chain disruptions, have caused a significant increase in inflation. While inflation is now starting to come under control, the pandemic has likely ushered in a more inflation-prone world due to various factors, including “bigger” government, reduced globalization, and geopolitical tensions. This has implications for interest rates and the potential growth of assets such as shares and property.
5. Worse Housing Affordability
Contrary to initial predictions, home prices did not collapse during the pandemic. Policy measures, such as support for household income and record-low interest rates, quickly turned the housing market around. Demand for houses increased, while housing shortages persisted. As a result, Australian home prices surged to record levels, leading to ever worse housing affordability for buyers and renters alike. This contributes to intergenerational inequality and higher household debt.
6. Working from Home Here to Stay
The pandemic accelerated the shift towards working from home (WFH). While there has been a return to the office for many, it is often on a part-time basis. The benefits of WFH, including no commute time, greater focus, and better work-life balance, have made it a preferred option for many employees and companies. A hybrid model of working in the office and at home is likely to become the norm, resulting in less demand for office space, higher vacancy rates, and lower rents. This shift may also lead to reinvigorated life in suburbs and regional locations.
7. Faster Embrace of Technology
Lockdowns forced everyone to embrace new online ways of doing things, accelerating the move to a digital world. Online retailing, virtual meetings, and remote work have become more prevalent. This fuller embrace of technology has the potential to unleash the productivity-enhancing capabilities of technology, including the rapid adoption of AI.
In conclusion, the lasting impacts of COVID have shaped a more fragmented and volatile world for investment returns. While there are positive aspects, such as the faster embrace of technology and the resilience of the global and Australian economies, there are also significant challenges, including “bigger” government, reduced globalization, and increased inflation. It remains to be seen how these impacts will unfold in the long term, but they are undoubtedly shaping the future of our world.
