Bad News Can Be Good for the Economy

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A driver has two routes to head home after work. Both are exactly the same distance, will take exactly the same time and will use exactly the same amount of petrol. But, somehow, we know that if the driver takes Route A, he will be in a minor bingle in which no one is hurt but two cars are damaged. If the driver takes route B, he will get home safe and sound.

You are the Australian Treasurer. Which route do you want the driver to take?

We rush to say that we are sure Josh Frydenberg does not want people to get themselves into bingles! And just for political purity, neither would Jim Chalmers, who wants to take Josh’s job at the next election. But it is a weird fact that the driver who causes a minor bingle will generate more economic activity than the one who gets home safe and sound. Tow trucks, panel beaters, insurance assessors, maybe a Police car or two. It sounds horrible, but in fact all of that human activity adds to the nation’s GDP. Things going wrong is a great way to create jobs!

We have seen that with the pandemic. Notwithstanding all the pain of lockdowns and border closures and cancelled events, Australia’s unemployment rate has fallen to its lowest level since 2008. This makes sense, really, when we think of all the extra economic activity that the pandemic necessitated, from vaccine development to fast food delivery.

We have seen this sort of thing before. Often, share markets thrive in bad times. This was first really observed in the US during World War One.  The market was officially closed for four months in the second half of 1914, having lost almost a third of its value in the preceding six months. But when it opened, it roared back and the US market, as measured by the Dow Jones, actually rose 43% during the course of the four-year war.

Between September 1939 and late 1945, the years of the Second World War, the Dow Jones rose by 50%! Here in Australia, unemployment fell from 8.76% in 1939 to less than 1% in 1943 – the lowest it has ever been. And that is after female participation in the jobs market rose by 31%.

Natural disasters such as bushfires and floods cause short to medium term disruption. But in the long-term, they generate substantial economic activity as the community ‘builds back better.’ Put simply, when things need to be done, our economy does not let resources go to waste.

This is why, right now, it is important to maintain your focus when it comes to building wealth through regular investment. With all the bad news we are facing, it can be easy to become pessimistic about the future. And then to let that pessimism lead you to become blasé about planning for the future. But there will be a future and it will be a busy future. You still need to plan for it and you particularly need to plan to benefit from it.

So, if you think you may have let your focus slip in the last couple of years, get in touch! We can help you make sure you are part of what remains a very bright economic future for Australia.

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