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Chief economist update: China on my mind

The All Ordinaries index finished 2020 with a gain of 0.7%. Nothing to write home to mother about, especially compared with the 16.3% and 16.0% surge in the S&P 500 and the Nikkei-225, respectively, over the same period.

However, the local bourse's performance when looked at in the context of the coronavirus pandemic that witnessed a virtual freezing of domestic and international activity - due to disruptions in supply chains, social restrictions, business and school lockdowns and cross-border closures.

The benchmark index rallied by 50.1% after dropping to an eight-year low on 23 March 2020 (a 32.9% loss from the start of 2020) buoyed by swift and aggressive monetary and fiscal policy responses.

The All Ordinaries index is up 1.5% so far this year and is expected to end the vaccine year 2021 with around a 15% gain.

This isn't hard to achieve, especially relative to the challenges that Australia (and the world) has had to navigate through last year. Fiscal and monetary support provided a parachute to falling domestic economic activity so much so the Treasury upgraded its 2020-21 GDP growth forecast to an expansion of 0.75% (MYEFO) from a contraction of 1.5% foreseen in the October Budget - leading to a lower unemployment rate and reduced underlying cash deficit (to 9.9% of GDP from 11.0% of GDP).

It's only gonna get better. The coronavirus vaccine presently being distributed in parts of the world provides optimism that covid-19, too, shall pass. Australia may not start inoculating its population until late February/early March but with only a 0.1% total cases of infection per million heads and only 0.004% deaths (based on worldometers.info data), Australians could afford to wait for the jab.

Latest Australian Prudential Regulation Authority (APRA) figures indicate that there's more than A$200 billion in savings - A$113 billion in household banking deposits and A$104 billion in non-financial business deposits - that are waiting to be deployed. Add to this the wealth effect from equity and property market gains.

What's not in the headlines but quite discernible is the way Australian businesses were able to adapt their operations to the COVID-19 normal. So too has the population's fear of contracting the virus, now that there's greater knowledge about its transmission (and the availability of the vaccine) and Australian's wide acceptance of federal and state laws implemented to control any outbreak.

Just imagine all those savings being put to use to satisfy pent-up demand.

While for sure and for certain, 2021 couldn't be worse than the annus horribilis that preceded it, risks remain.

Recall that this time last year, the world was applauding the US-China trade deal.

Trump's now gone and Biden could begin repairing Sino-Yankee relations.

But Australia has graduated from being caught in the US-China spat crossfire to being directly in Beijing's line of fire.

Unless diplomatic and trade tensions with Australia's biggest trading partner ease, and soon, this one could become the domestic economy's biggest stumbling block for 2021.

Read our full COVID-19 news coverage and analysis here.

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