Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 406

Are we underestimating the peak of the V-shaped recovery?

By now most investors are tiring of their email in boxes filling with economists and strategists talking about reflation (that is, a recovery in spending and economic growth), how much more optimistic they are relative to consensus, and for how much longer the reflation trade will persist.

There were very few people talking about a strong V-shaped recovery this time last year. Indeed, a scan of the forecasts of leading sell-side economists in April 2020 shows consensus forecasts of 3% for the CY21 for Australia and 3.8% for the USA.

A switch to stronger growth forecasts

Indeed, peak pessimism was not reached until September 2020, when economic growth downgrades ceased and modest upgrades commenced. Currently, consensus for CY21 has risen to 5.7% in the USA and 4.4% for Australia.

In contrast, our forecasts for the US in 2021 – which we published in mid-April 2020 – was 6.5% (represented by the cross in Chart 1). For Australia (Chart 2) we were even more optimistic, forecasting 7.0% economic growth. As we moved through 2020, it was clear the expected contraction in economic growth in 2020 was less than expected and we reduced our forecast rebound in Australia’s economic growth in 2021 to a still sizeable 6.0%.

Much of our more upbeat analysis was based on:

  1. the nature of the shock being more akin to a natural disaster
  2. the quantum of the fiscal packages
  3. excess credit growth
  4. the outlook for vaccine development
  5. the prospect of pent up demand.

One year on, the clambering to upgrade growth estimates has only intensified. Over the past two months, consensus forecasts for Australian economic growth in 2021 have been upgraded a further 0.7%. In the USA the revision over the past two months is a remarkable 1.6%.

For Australia. we remain 1.5% above the consensus forecast and around 1% above the most optimistic other forecaster. What supports our optimism?

1. Australia’s data consistently beats economic forecasters

Charts 3 and 4 show our calculation of economic data surprises for economic activity and inflation relative to consensus forecasts (US vs Australia). A positive reading represents economic data beating consensus expectations weighted by data importance and time decay.

Clearly, Australia’s economic activity data is not only continuing to beat increasingly upbeat economic forecasts, the positive data surprises are larger in Australia.

2. Real economic growth is expanding at pace

Our 'nowcasting' techniques (Chart 5) for gauging in real-time how fast the economy is expanding already suggest that real economic growth was expanding at 4% yoy by the end of 1Q2021. 

Note: Our nowcasting methodology is to estimate real time economic growth via both dynamic factor models and principal component models for each of the major economies to provide an alternative underlying picture of economic growth to the often noisier official GDP data.

3. Treasury’s projections have been comfortably exceeded

Much stronger economic growth, much lower unemployment and much stronger commodity prices have combined to already deliver a $23 billion better fiscal outcome relative to Treasury’s December projections and closer to a $50 billion saving over the next four years.

The question for Q2 is how much more of an 'economic surprise' dividend will likely flow through the Budget and what will the Government do with it?

We believe the Treasury’s growth figures are 0.5% too low for 2020-21 and 1.25% too low for 2021-22. The unemployment rate is likely too high by as much as 2%. And an iron ore assumption of $55/tonne embedded in the Budget is one-third of the current iron ore price. Clearly there are further major revenue upgrades to come.

Our take is that the May Budget will be used mainly to evidence the vastly better Budget and economic outcomes that have been achieved. We expect the true election Budget will come in late 2021 (i.e. mid-year Budget), with more strategic spending and tax changes announced to setup a May 2022 Election. The combination of the Coalition’s political challenges and the Budget’s economic windfalls will likely spark additional fiscal spending later in 2021, sufficient to bolster economic growth expectations.

Momentum to continue over 2021

Mid-2021 will likely mark the peak of global economic data surprises and the final phase of economic growth upgrades. Nevertheless, we believe there is more oxygen in Australia’s economic recovery and that consensus has long been too slow to recognise the domestic economy’s capacity to expand at close to 6% through 2021. 

While this will set off expectations of a higher cash rate ahead of the RBA’s 2024 guidance, the RBA can be expected to attempt to allay those fears by making the case that inflation expectations and wage growth remains too low to be consistent with their inflation objective. Nevertheless, the likely RBA growth upgrades will almost certainly end the prospect of the RBA rolling the 3-year bond beyond the April 2024 target. Together with the end of the Term Funding Facility in mid-2021 the reality is that a very modest tightening cycle is already commencing.

 

Tim Toohey is Head of Macro and Strategy at Yarra Capital Management. To the extent that this article discusses general market activity, industry or sector trends, or other broad based economic or political conditions, it should be construed as general advice only. References to ‘consensus’ throughout relate to Bloomberg consensus unless otherwise stated.

 

  •   5 May 2021
  • 4
  •      
  •   

RELATED ARTICLES

The coiled spring: markets are primed for the year ahead

Why is Aussie inflation so stubborn?

Get set for a bumpy 2026

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Latest Updates

Planning

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Superannuation

There's a reason why your super is locked up until your 60s

For decades, it seemed settled. Then one controversial idea reignited a debate that could reshape the financial future of millions. The real question isn’t who’s right or wrong, but whether a long-held assumption deserves another look.

Property

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Retirement

Under-retiring: The greatest retirement risk in a generation

Two retirees. Similar savings. Completely different lives. New research from Challenger reveals why some Australians confidently spend in retirement while others hold back and the overlooked factor shaping retirement decisions.

Five risks to watch in markets

Things you may often hear are: a recession is around the corner, markets are overpriced, the AI sector is about to flop at any moment. It’s like the never-ending laundry pile that sits in my house, it never really disappears.

Investment strategies

Do you qualify as ‘rich’?

What does it mean to be 'rich'? For something so universally desired, it is surprisingly difficult to define. That ambiguity creates a challenge for investors and raises a bigger question about what financial success really looks like.

Investment strategies

If you’re worried about your bond portfolio, you’re missing the point

Most investors think they know what bonds are for. But when markets turn volatile, a surprising misunderstanding can lead to costly decisions. Here’s the overlooked lesson that could change how you view your portfolio.

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.