What are the long-term implications of COVID-19?

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May 26 2020
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Despite government focus being on the short term, with stabilising unemployment and markets being the key, an economist has highlighted that the shock is likely to have long-term implications for the wider economy.

According to AMP Capital’s Dr Shane Oliver, the health pandemic is likely to change world markets and how investors think.

The first implication, according to the economist, is interest rates are likely to remain low for longer periods of time, which is likely to push asset prices higher.

“Low rates mean very low returns from bank deposits and ultimately bonds, but they make higher yielding shares and assets like property and infrastructure relatively attractive to investors once the hit to earnings and rents passes,” Dr Oliver said.

Dr Oliver also believes the economy will be hampered by lower migration rates and weaker globalisation over the next few years.

“Recent years have seen a backlash against globalisation evident in the rise of Trump, Brexit and a backlash in some countries against immigration. The coronavirus disruption has added to this,” Dr Oliver said.

While some economists might argue that moving away from a heavy reliance on one country could be good for the Australian economy, Mr Oliver believes it could have longer-term implications for world growth.

“While the outcome may simply be a diversification in reliance away from China to other emerging countries, the risk is that this all leads to reduced growth potential for the emerging world generally,” he explained.

“Longer term, it could reduce productivity if supply chains are managed on other than economic grounds and could remove a key source of disinflationary pressure from the global economy,” Dr Oliver continued.

He also believes inflation due to the printing of money could hurt consumers in the medium term.

“It’s hard to see inflation becoming an issue in the next three years – the combination of rising public debt, money printing and more protectionism risks a longer term pick-up in inflation to stay above 4 per cent, particularly if central banks don’t reverse easy money quickly once spare capacity is used up,” Dr Oliver said.

The economist believes that this could be bad for longer-term growth.

“A resurgence in inflation to high levels would be bad for productivity and negative for assets that benefited from the ‘search for yield’. But it’s a much longer-term issue,” Dr Oliver concluded.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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