Forget the recovery, this is expansion

This is no longer a recovery. This is expansion.

It might sound a bit early to be engaging in such semantics but it's actually quite important. The cycle is changing rapidly, and the data suggest we have moved from a recovery period to an expansionary one.

Gross domestic product in most of Asia finished 2020 above pre-pandemic levels. In New Zealand it did the same. In countries like Australia and the US that will happen in 2021 and prospects are getting brighter all over the world.

Unemployment has fallen very sharply in China while in the US, it has retraced about three quarters of its pre-pandemic rise. In Australia, ANZ job ads suggest unemployment will continue to fall quite rapidly.

We're at an inflexion point around monetary easing. We seem to have hit the peak. China has been winding back for some months, while NZ has introduced some controls on housing. India has tightened cash reserve requirements and in Australia there have also been some shifts in policy.

A few things will need to happen to cement the shift from recovery to expansion. Vaccine rollouts need to continue – and be effective. Recent reports around success in preventing transmission is very good news.

Implications

So what does this all mean? The increase in bond yields, which should continue, is increasingly likely to occur because of increases in the real component rather than the inflation component.

The inflation component in the US bond market is now meaningfully above two per cent, which is consistent with US Federal Reserve policy. That looks quite mature.

We're likely to see the US dollar be less weak. A cyclical recovery typically is good for high-beta currencies, but the increase in US bond yields, I think changes the dynamic there.

Fiscal policy in many countries should increasingly shift from a pandemic response to a longer-term view.

In the business sector, the light at the end of the tunnel is clearly becoming bigger. The shift to expansion is likely to mean business will focus on investment as capacity constraints start to emerge.

As a final point, the COVID-19 crisis in large part should be transitory. This was not a shock driven by unsustainability in the economy, as we would normally understand it.

That means as vaccines roll out and economies return to normal, the sort of policy settings we've seen during COVID-19 are not going to be appropriate - they're going to be too stimulatory. We're already seeing signs of that in a number of countries.

Richard Yetsenga is Chief Economist at ANZ