Deloitte Access Economics Business Outlook

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Deloitte Access Economics Business Outlook: recovery delayed, not derailed

October 2021

11 October 2021: We assume (1) vaccination rates are hitting 80% double dosed in NSW, with Queensland, SA and WA to eventually reach that milestone in December, (2) the transition from “relying mostly on lockdowns” to “mostly relying on vaccinations, masks and QR codes” is ugly, but ultimately effective, (3) cases spike but hospitalisations and deaths remain very low by developed world standards, while (4) international borders re-open very gradually, with some form of quarantine to remain for most incoming travellers for some time.  That keeps international travel very weak in 2022, and it may not return to pre-pandemic levels until 2024 or even 2025.

Vaccinations are slowly beating mutations in the rich world.  But the poor world remains mostly unvaccinated.  That’s a problem for everyone, as it means more mutations could be coming.  And it leaves the poor world doubly exposed:  as the likes of the US recover, they’ll start to unwind their policies of super cheap credit, yet those policies have helped the poor world stay afloat.  So we see a two-track global recovery, with advanced economies continuing to recover and repair through 2022, but the developing world stuck in the doldrums until 2023.  And although that global backdrop is pretty good, China is amid a sharp slowdown, so the net impact of global economic developments on the Australian economy is turning down once more.

Most Australians have been locked down.  Confidence has been hit.  Iron ore prices have plummeted.  And although government supports have lifted, they’re smaller than they were during Melbourne’s second wave.  Yet if you want to know where Australia’s economy heads next, then don’t focus on those things.  Focus on vaccination rates.  Vaccinations are the best possible stimulus for our ailing economy – with daylight second.  Forecasts for everything from wages to unemployment to hospitalisation and haircuts depend on vaccinations.

But so far only the NT, NSW and Victoria have done much to move the dial via mandating vaccines in key sectors.  Elsewhere there’s been only modest use of public health orders, and the feds have delivered little support for businesses looking at their own vaccine mandates.  Yet, even with only timid support from our leaders, the recovery through 2022 should still be excellent.  The Australian economy isn’t broken – it is merely locked down.

Inflation has bounced, but it’s mostly a dead cat bounce.  Prices are up amid a range of one-offs, with higher costs in childcare and electricity (as temporary government supports disappear), in petrol and timber (as their pricing bounces back from COVID lows), and in cars, computer chips and shipping costs (as pandemic-driven demand increases smack into supply chain dramas).  But a sustained increase in inflation requires a sustained and large lift in wage growth.  And that is miles off:  wage growth is still a bug on the windscreen of this pandemic.  Yes, both wage gains and consumer price pressures will sustainably lift, but only very slowly so.

Markets have finally switched to decaf, finally fretting less about phantom inflation scares.  And about time.  Luckily the Reserve Bank kept a cool head.  It is sticking to the view that it won’t raise its cash rate until 2024.  (We think that’s the right approach – so right that, ironically, it could repair the economy enough that the first rate rise arrives in 2023.)  Meantime the US Fed is the first of the big guns to get serious about winding back stimulus, partly because the US has the added element there of their big infrastructure spend.  The RBA’s withdrawal of QE is pretty cautious.  Add in the falling iron ore price and the spanner that Delta has thrown into the local economy, and the $A is posing no dangers to the coming recovery in Australia.

Lockdowns cost jobs.  And we’ve had lockdowns galore since Delta dawned.  The good news is rapid vaccinations have reduced the damage, and the job recovery should be great.  But just how great will depend on how many people don’t get jabs.  Fewer jabs will equal fewer jobs.  Absent further vaccine mandates, that could slow and cap the job recovery.  The other big question is on the timing of opening in international borders.  We’ve been plenty spooked by COVID, and that may keep flows over Australia’s borders on a tight leash for some time.

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Recent lockdowns have battered government budgets less than you’d think.  Partly that’s as budget repair was running well ahead of schedule when Delta dawned.  Partly it’s as official forecasts of key revenue drivers (such as iron ore prices) have been conservative.  And partly it’s as support from governments this time is less than it was during Melbourne’s second wave.  (COVID disaster payments are a partial-but-reasonable replacement of JobKeeper, but there hasn’t really been an equivalent of the Coronavirus Supplement.)  Better still, borrowing costs took another dive just when we need to borrow more, so Delta lockdowns and associated policy responses add just one-hundredth of one percent of national income to ongoing annual net federal interest payments.

Yet there’s still bottom line damage:  the public sector deficit this year will be almost 2% of national income higher than the combined federal and state budgets had pencilled in.  But the budget isn’t bollocksed.  Yes, it needs repair.  But that repair isn’t due to the one-off costs of COVID crisis fighting.  It’s needed mostly due to recent decisions to boost social spending.  Those decisions were much needed, but they haven’t yet been funded.

Industries – what next?

It’s déjà vu all over again.  Lockdown dependent sectors have been smashed, with much of their recovery delayed into 2022.  Vaccines remain the key to the easing of restrictions and lockdowns, yet that still says transport, hospitality and parts of retail have a long road ahead of them.

Many sectors were still struggling to get back to their pre-COVID strength.  And then came Delta, and Delta fights dirty:  the industries hardest hit by the latest lockdowns were those still bearing the scars from 2020.

Renewed pain is well and truly back for transport and storage (from the spate of border closures), for hospitality and for arts and recreation (locked down venues), and for admin services (pain for job agencies and travel agents).

Farming is doing better (with this year seen within an ace of repeating last year’s record harvest), while the public and health sectors are too (as they’re central to the battle against the virus).

This is a bitter cup.  The recovery in lockdown hit sectors from their current pain will extend well into 2022.  And a cruel twist is that the speed and eventual extent of recovery lies entirely in the hands of the vaccine hesitant.

But the bottom line for industry growth forecasts is simple:  the deeper that Delta is hurting right now, the greater the rebound potential.

States and territories – what next?

The 40% of us who live in COVID-free states should enjoy the economic benefits of that.  But they should also vaccinate fast, ready for the day Delta breaks down the door, or for when they rejoin the rest of Australia and the world.  The costs of reopening will be much smaller when all states and territories are very well vaccinated.  That may come earlier for Queensland than it does for WA, as Queensland is more reliant on border communities and domestic tourists.  As time passes it will be a lot clearer when it will make sense for Queensland and WA to open up.  There will never be a consensus on exact timing, but we can’t see much point in joining the Twitter pile on.  And nor will it make a huge difference to the national economy.

All Australians should want domestic borders to fall when the time is right, but optimal timing may be different for some states than others.

Delta has reared its ugly head and NSW has had to vaccinate fast.  But it’s done that.  Opening up will see cases  soar, but the key question is what happens to hospitalisations and deaths, and what that then does to public confidence.  Still, international experience – and NSW’s from a year ago – suggests 2022 will see rapid recovery.

Case numbers may be very high, but the outlook for Victoria’s economy is a function of vaccinations – not cases.  So prospects are better than most realise.  As recently as three months ago, the state’s economy had performed a Houdini-like escape from the clutches of COVID.  And 2022 should see a rerun of most of those same gains.

Not enough vaccinations.  The Sunshine State’s great success in shutting out COVID is delivering big economic benefits.  But those successes are fragile, and Queensland will remain at greater risk of the Delta blues until its vaccine hesitancy and complacency are finally overcome.  Getting the opening phase right is vital.

South Australia has had a remarkable run through COVID.  Part of that has been better news on the ‘people power’ front, with more arrivals from the rest of the nation.  And some of that may stick:  if working from home is a structural shift, then why work from home in crowded and expensive Sydney or Melbourne?  Adelaide awaits.

COVID-free is a precious asset.  But it is also a fragile one.  And the next phase for WA may see it have less protection from China and iron ore prices, as the West again finds itself riding the commodity price rollercoaster.  But this is no repeat of last time.  The state is better prepared to ride this downswing that it has been in the past.

Tasmania’s borders have been its greatest asset through COVID.  But vaccinations – inside and outside the state – are the best leading indicator to watch.  And how the state transitions to more open borders will be very important.  The good news is that Tassie looks well placed to be able to choose the timing of that transition.

Footloose and COVID-free, the Northern Territory has shown great resilience through COVID.  Initially, recovery was supported by booming trade volumes.  But the baton is increasingly being passed to families.  And that’s a very welcome development that hasn’t been able to be said about the Top End’s economy for quite some time.

The ACT’s long COVID-free run has come to an end.  But boasting the best vaccinated population in the nation gives Canberra recovery potential that’s better than anywhere.  And rising government spending on everything from social services to AUKUS-related programs will help support the territory’s longer-term prospects.

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