Australia’s economic recovery from the COVID-19 shock has been impressive by advanced economy standards. Last week’s figures showed GDP was down by only 1.1 per cent y-o-y through 2020. Two key things have helped. First, the virus has been largely contained, even without the vaccine rollout, given the success of health policies and of border closures in particular. Second, the policy stimulus has been very large.

There are good reasons to expect growth to continue in early 2021. To start with, the COVID-19 case numbers are very low, even before the vaccine has rolled out. As of 8 March, the nation has had 10 days of no community transmission – the largest state, New South Wales, has now had 50 days with no community transmission.

The household sector is also sitting on more than the usual degree of savings, due to the large fiscal transfers, and a drawdown of this saving should support more growth in spending.

However, there are also significant challenges as the economy adjusts to a post-pandemic ‘new normal’.

First, the international border is still essentially closed to people movement, which has stalled migration, tourism and foreign student arrivals.

Our working assumption is that the vaccine rollout will reach around 70 per cent of the population by October 2021, which, in principle, should allow re-opening. However, convincing the population to accept any cases of COVID-19 community transmission may be a challenge.

Second, the pandemic has driven behavioural adjustments, including more work from home, sharply reduced business travel and increased on-line retail sales. While people are starting to return to the office, business travel should start to resume and shopping centres are set to get busier, some of the effect of the pandemic will be permanent.

Third, another aspect of the ‘new normal’ for Australia is that conventional monetary policy is at its limits.

Fourth, Australia’s geopolitical relationship with Mainland China has become more strained since the pandemic began. This has seen various trade policy changes, such as China’s application of tariffs to Australian wine and barley imports and non-tariff restrictions on meat and coal imports, as well as a tightening of foreign investment rules in Australia. So far, the falls in Australian exports to China of these various products have been more than offset by the rising value of exports of iron ore. When iron ore prices fall, as we expect in coming quarters, the geopolitical challenges are likely to remain.

All of these adjustments are underway, but many businesses are yet to face the full force of their implications, as they have been supported by the large COVID-19 fiscal support programmes, including the ‘JobKeeper’ scheme, most of which are set to end later this month. We expect more targeted fiscal support programmes are likely to be announced in the lead up to the May budget. But calibrating the optimal economic response while navigating the political cycle will be a challenge.

Australia’s economy is in an upswing, but it is to a ‘new normal’ that is still quite uncertain and which will create significant challenges.

First published 7 March 2021.

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