Deloitte Access Economics Business Outlook

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Deloitte Access Economics Business Outlook: Bump will become grind

Vaccinations set to beat mutations, underpinning global and Oz recoveries

April 2021

12 April 2021: We assume that

  1. virus numbers stay suppressed as vaccine logistics steadily improve, so state borders remain mostly open and domestic restrictions gradually ease as vaccines roll out
  2. vaccines achieve the equivalent of herd immunity by late 2021/early 2022, but
  3. international borders re-open very gradually.  For Australia, some form of quarantine will remain for some incoming travellers for some time.  That keeps international travel (both inbound and outbound) pretty weak in 2022, and it may not return to pre-pandemic levels until 2024.

The global rebound looks increasingly solid, with

  1. vaccinations mostly beating mutations, ushering in a virtuous circle as COVID dangers fade through 2021 in developed nations and then through 2022 in the rest of the world, and
  2. as governments and central banks keep supporting the recovery to an extent they failed to do after the GFC.  The Asia-Pacific fought off COVID better than most, and so it has led the global recovery.  But the US is set to soar, and even the hard hit UK will ride its vaccine rollout.  Europe may be slower, as it has fumbled its vaccines.  Yet that’s a temporary setback: and vaccinations will eventually be a great leveller across economies.

Australia’s economy is already roaring back.  Remarkably, living standards grew faster through 2020 than their average gains over the past decade – partly because the world is giving us a pay rise despite the recession (via prices for iron ore, LNG and thermal coal), and as it is giving us a cost cut too (via lower interest rates on our foreign debt).  Yet the big bump from Australia’s reopening economy will gradually ease from here, as emergency government assistance continues to fall away.  That will see further catch up growth become more of a grind.

Central to the speed of that grind will be the ongoing tug-of-war between mutations and vaccinations.  But we continue to see vaccinations as the more likely winner of that struggle.  So although some pain will linger – particularly as the mutations mean international borders will remain less-than-fully open for longer – most of Australia’s economy looks on course to be close to pre-pandemic normal by Christmas 2021.

Markets think inflation is coming. Some prices have jumped back – oil, for example, is back at pre-pandemic prices. However, those are mostly one-offs.  A sustained lift in inflation requires a conga line of things to happen.  To begin with, unemployment and underemployment have to fall enough to give pricing power to workers (to hike wages) and businesses (to hike prices).  Yet unemployment is going to take quite some time to get down to the point that it gooses wages, wage agreements will take time to reflect stronger bargaining power, and prices will take time to fully reflect faster wage momentum. So don’t worry too much if you’re hearing inflation is a threat. Have a Bex and good lie down. It’s gonna take time and a whole lot of spending money before inflation is back.

Markets are increasingly banking on a huge global recovery, so they’ve bid up long-term interest rates.  But that’s a vote of confidence.  Even if demand does rapidly recover the huge ground it lost during COVID, it will take years to fully pass that into wages, and even more time before central banks finally raise rates.  In fact you’ll see the first lift in official rates a mile off – as you’ll see it in accelerating wages long before you see it in the decisions of central banks. For Australia, that still says 2024 before any increase in the RBA’s 0.1% cash rate. Meantime, we see the huge spending of the Biden administration driving a lift in the $US, and a corresponding easing in the $A.

The job recovery is already really remarkable. Don’t lose sight of that over the next few months:  things will be cloudy, with many stories of individual business closures and job losses amid the end to JobKeeper.  Even so, we forecast overall jobs to hold up amid ongoing momentum in the wider economy.  Unemployment is already under 6%. And although it won’t fall further for some months now that JobKeeper has ended, we forecast it at 5.6% by late 2021, 5.3% by late 2022, and 5.1% by late 2023. That’s not perfect, but it’s still great.

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But caution over mutations means it will be some time before migrants start to come again in any numbers – that may not really begin until 2022, and it may be 2023 before migrant numbers are notable.  That underscores the gap between our pre-COVID population forecasts and our current ones.  And it leaves our job markets without a safety valve for longer, so specific skill shortages will crop up sooner than you think.

Taxpayers carried us through this crisis.  Now vaccinations will increasingly take that load – as they should.  That’s going to be a messy transition, and new sticky tape will keep coming.  But the peak of the deficits is already past, and we locked away the borrowing for them at bargain basement rates.  Meantime, a virtuous circle is helping – the economy is outperforming, and though that raises some costs (including via higher interest and exchange rates), those negatives for budgets are easily swamped by associated positives (savings on emergency support, more jobs, stronger commodity prices, better profits, and robust consumer spending).  That’s why both federal and state governments will see further brightening in their budget outlooks.  Meantime, the government said it wouldn’t worry about repairing the budget until unemployment was “comfortably below 6%”.  But we’re already so successful that we should move that target closer to the 4.5% unemployment rate that the RBA uses.

Industries – what next?

2020 tore industry performance apart.  Vaccines will draw performance back together.  But that will be slower for some sectors, because movement across international borders will take years to restore. 

The sectors that defended our lives and livelihoods all grew in 2020 – the public sector, health care, and the banks (with the latter funnelling the Reserve Bank’s emergency help to business and families).  After an awful start, retail also ended up growing, partly as we couldn’t travel.  So too did education – foreign students are important, but they aren’t the whole story. 

But lockdowns and border closures tore the heart out of accommodation and food (cafes and restaurants, pubs and clubs, hotels and motels), transport (air travel collapsed, though other travel held up better), admin services (travel agents, and those who service offices and shops), and arts and recreation (movies, theatres, convention centres).

Yet that 2020 picture is already history.  Keeping virus numbers extremely low has already allowed most businesses to reopen in most of the nation.  And the vaccine rollout will gradually cement those gains). 

That’s why the sectors that did worst in 2020 are among those that will do best in 2021 – there’s a substantial rebound already underway in each of accommodation and food, arts and recreation, and admin services.  But that doesn’t mean they’re healthy.  It just means they’re out of intensive care and on the mend.

International borders that are mostly closed means transport and storage remains a mid-ranking performer in 2021.

The sectors that are set to be the weakest in 2021 are in that position for a reason.  The public sector will be starting to ease back after its 2020 sprint, while education does no better in 2021 than it did last year, as more foreign students finish their courses and go home, but very few take their place.

The standout sector in 2021 is farming.  After two years of drought, 2020 saw lots of rain – enough to see the winter wheat crop more than double in size, reaching a new record high.

And the states and territories?

Australia’s smaller states and territories have already achieved the bulk of their recovery from COVID, boasting economies that are bigger than when the pandemic hit.  Be impressed:  each of the ACT, Tasmania and West Australia have equalled or bettered the performance of China (the fastest growing national economy across the globe through 2020).  Queensland and NSW still have some catching up to do, Queensland because of its dependence on state and international borders, and NSW because of its upfront pain but also the ongoing lack of migrants, foreign students and tourists.  Victoria’s recovery task is the biggest by a long chalk, yet its catch-up is already happening at high speed.  And by the end 2021, vaccines should have helped to further close these gaps.

The success of NSW’s front line of defence – its tracking and tracing – has been world class.  That’s kept businesses open and families spending.  And although soaring house prices will eventually bite Sydney, pricing it out as a place to live, it helps near-term recovery.  But the costly lack of migrants, foreign students and tourists looks set to linger.

Victoria’s economy suffered much more than any state or territory during COVID, and so the withdrawal of JobKeeper and other supports is a bigger problem for it.  But its recovery has already been remarkable, and it will grow faster than any other state through 2021 – as it still has much more catch up potential than the others.

Queensland’s striking success against COVID came at the cost of state border closures and the related loss of jobs.  Taxpayers helped to pay for that, but from now, it’s mostly up to vaccines to keep borders open and tempt Australians back into domestic travel.  Making that happen will be vital for Cairns and the Gold Coast in particular.

SA jumped out ahead of the virus, getting its unemployment rate down fast.  But that successful recovery bump is already slowing, and the remainder of recovery will be more of a grind.  China’s trade bans are hurting, and it looks like a long wait until international borders allow migrants to help stem the impacts of an ageing population.

The state of steel, WA, is looking sweet thanks to lovely iron ore prices (they won’t stay this high, but the good news will linger) and to its successful hard border policy (which comes at less cost to WA than it does to other states).  However, with the West’s recent growth to slow, much of its recovery from COVID has already been banked.

Tasmania’s economy navigated 2020 better than any other state, thanks to success in crushing COVID numbers and in surfing the generosity of federal taxpayer support.  But it has probably already seen the best of its recovery – taxpayer support is fading, and further growth may be more of a grind than it’s been so far.

The Northern Territory got on top of COVID fast, and then did the rest of the nation a favour with Howard Springs.  The good news is that the recovering world economy may ignite mining and energy developments.  The bad news is that, outside the Barossa gasfield, there’s not all that much that looks likely to start any time soon.

The federal government carried Australia through COVID, and so the ACT’s public service got bigger.  In fact the ACT often outperforms during recessions thanks to its government strengths.  But that’s rather less good news in the national recovery phase, and Canberra’s recent economic success is already starting to come back to the pack.

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