There are no prizes for guessing what dominated the economic landscape in 2021. For the second year running, the pandemic was the focus for policy makers, markets, businesses, and individuals alike.

The year began with hopes that the rollout of vaccines around the globe would stem the spread of COVID-19 and allow economies to reopen. Instead, most countries were hit by wave after wave of the virus, periodic lockdowns, and ongoing disruption to lives and livelihoods.

Yet there were also positives. Australia’s vaccination rate exceeded all expectations while property and share markets soared. Investors who stayed the course enjoyed double digit returns from their superannuation, with the median growth fund tipped to return more than 12 percent for the year.i

Australia key indices DecemberShare markets (% change) Year to December
Economic growth-2.2%*3.9%Australia All Ordinaries-1.45%13.56%
RBA cash rate0.1%0.1%US S&P50016.37%27.0%
Inflation (annual rate)0.9%^3.0%Euro Stoxx 50-5.14%20.90%
Unemployment6.6%#4.6%Shanghai Composite13.87%4.80%
Consumer confidence112.00104.3Japan Nikkei 22516.01%4.91%

*Year to September, ^September quarter # November

Sources: RBA, ABS, Westpac Melbourne Institute, Trading Economics

The Big Picture:

If the pandemic has taught us anything, it is to expect the unexpected as new variants of the coronavirus – first Delta and now Omicron – hampered plans to return to a ‘new normal.’ This saw governments removing restrictions one minute, then reimposing lockdowns and border closures the next.

Yet through it all, the global economy picked-up steam. Final figures are not yet available, but in the year to September, the two global powerhouses: US and China – grew at an annual rate of 4.9 percent, while the Australian economy grew by 3.9 percent.

The Australian economy is estimated to have grown by more than 4 percent in 2021 and is forecast to pick up speed in 2022 to around 5 percent. This is good news for jobseekers, with unemployment falling to 4.6 percent ahead of the Christmas rush.

But challenges remain. As global demand for goods and services increased, ongoing shutdowns disrupted manufacturing and supply chains. The result was higher prices and emerging inflation.

Inflation and interest rates:

Australia’s inflation rate jumped from less than one percent to 3 percent in 2021. This is lower than the US, where inflation hit 6.8 percent, but it still led to speculation about interest rate hikes.

The Reserve Bank insists it will not lift rates until inflation is sustainably between 2 – 3 percent, unemployment is closer to 4 percent, and wages growth near 3 percent. (Wages were up 2.2 percent in the year to September.) The Reserve does not expect to meet all these conditions until 2023 at the earliest, but many economists think it could be sooner.

Some central banks such as the UK and New Zealand have already lifted rates. And while Australia’s cash rate remains at an historic low of 0.1 percent, bond yields point to higher rates ahead. Australia’s 10-year government bond yields rose from 0.98 percent to 1.67 percent in 2021, while US long bonds finished at 1.51 percent.

Even so, low interest rates were not enough to convince everyone to resume normal life and spend. While consumers remained positive overall, the Westpac-Melbourne Institute consumer sentiment index fell 6.9 percent in the year to December.

Shares continue to shine:

Global share markets made some big gains in 2021, on the back of economic recovery and strong corporate profits. The US market led the way, with the S&P500 index up 27 percent to finish at near record highs.

European stocks also performed well while the Chinese market suffered from the government’s regulatory crackdown and the Evergrande property crisis.

In the middle of the pack, the Australian market rose a solid 13.5 percent in 2021. The picture is even rosier when dividends are added, taking the total return to 17.7 percent. The best performing sectors were telecommunications, property trusts, consumer discretionary and financials. Only two sectors fell – energy and information technology.ii

Volatile commodity prices:

As the global economy geared up, so did demand for raw materials. Commodity prices were generally higher but with some wild swings along the way. Oil prices rose around 53 percent on supply constraints and increased demand. And although coal is due to be phased out in the long term, thermal coal prices soared 111 percent and coking coal rose 37 percent.

Australia’s biggest export, iron ore, fell 25 percent but only after hitting a record high in May.

Despite demand for our raw materials and a sound economy, the AUS dollar fell against the strengthening greenback. After starting the year at US77c it finished at US72.5c, providing a welcome boost for Australian exporters.

Property boom:

It will not have escaped anyone’s notice that Australia’s residential property market had another bumper year, although the pace of growth shows signs of slowing. National home prices rose 22.1 percent in 2021, according to CoreLogic. When rental income is included, the total return from property was 25.7 percent.iii

Regional areas (up 25.9 percent) outpaced capital cities (up 21.0 percent) as people fled to the perceived safety and affordability of the country during the pandemic. Even so, prices were up in all major cities, led by Hobart (28.1 percent), Brisbane (27.4 percent) and Sydney (25.3 percent). Melbourne suffered from prolonged lockdowns, up 15.1 percent.

And in news that will please owners and investors but dishearten first time buyers, Sydney became the first city to surpass a median value of $1 million.

Looking ahead:

The pandemic is likely to continue to dominate economic developments in 2022. Much will depend on the supply and efficacy of vaccines to protect against Omicron, and any future variants of the coronavirus.

Financial markets will also keenly watch for signs of inflation and rising interest rate. In Australia, inflation is unlikely to be constrained while wages growth remains low, and the Reserve Bank keeps rates on hold.

The wild card is the looming federal election, which must be held by May. Until the outcome is known, uncertainty may weigh on markets, households and business.

Unless otherwise stated, figures were sourced from Trading Economics on 31/12/21.