Australia seemed to have the COVID-19 virus under control until a handful of cases emerged in Sydney’s Northern beaches just before Christmas, followed by a small number in Melbourne and Brisbane.

In the global context, the outbreak is small. Australia’s average case numbers reached 25 cases a day at the start of 2021 when the UK’s passed 50,000 and US cases exceeded 200,000. But even a small outbreak in Australia can lead to an economically significant effect, given the government’s high-sensitivity to small numbers of cases.

The Australian outbreak triggered economically significant tightening of virus-management restrictions, including suburb and city-level lockdowns, closures of most state borders and mandated mask-wearing in some locations. Economic activity has slowed, with people making fewer journeys.

The economic momentum through most of the final quarter of 2020 appears to have been strong, particularly the retail figures. After forecasting consumer-led growth of 2.0 per cent in the October-December quarter compared with the previous three months, we predict some loss of momentum, with growth slowing to 1.2 per cent in the first quarter of 2021 and just 0.5 per cent in the April-June quarter.

Policymakers pulled forward the rollout of vaccines to February, but the programme will take time. Very low tolerance for any cases will remain a key driver of health policy moves for some months, particularly border restrictions.

Many of the economic support measures used to manage the initial shock are also tapering, have ended, or will end soon. These include the JobKeeper wage-subsidy, the coronavirus supplement to unemployment benefit, safe-harbour arrangements on corporate insolvencies, and most mortgage-repayment holidays.

Fiscal policy choices are likely to get harder in coming months. It is much easier for policymakers to spend more than it is to pullback on that expenditure – particularly when the spending measures and other policy actions have delayed some inevitable economic adjustments.

We expect Australia's recovery to continue in 2021 with rising GDP. It should avoid the ‘W-shaped’ recovery possible in many other developed economies, but it is still expected to involve significant unevenness across sectors and growth that is particularly sensitive to just small changes in the path of the virus.

If policymakers thought 2020 was tough, 2021 looks as though it will be equally, if not more challenging.

First published 11 January 2021.

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