Australia: From frontrunner to laggard

Australia has been plagued by the re-emergence of Covid-19 in the past two months. The new number of daily is still increasing on the continent, especially New South Wales is impacted with almost 1200 new cases at the moment of writing. The government is seen as a scapegoat in this sense, as the vaccination rates were among the lowest in OECD countries, turning Australia from a frontrunner into a laggard. The central government has tried to accelerate the vaccination process as they push for herd immunity. The current strategy is to ease lockdowns when 70% of the population is vaccinated and to start opening international borders when 80% is vaccinated. Figure 1 illustrates the vaccination process going forward, assuming a vaccination rate similar to last week, sufficient vaccine availability and willingness by the population. In this scenario, 70% will be vaccinated by the end of September. This, then, would mean at least another month of lockdowns. However, the very transmissible delta strain appears to be too transmissible within communities and, as we already pointed out a month ago, this raises doubts about the feasibility of the government’s ‘zero-Covid strategy’. To complicate matters, there is significant divergence between states. The premier of NSW recently said that a zero-case strategy is not realistic neither for epidemiological nor for societal reasons, as the population is increasingly fed up with lockdowns. Other states react by isolating themselves from the impacted regions, closing their borders to other Australian states, complicating matters for business.

The resurgence of the virus and lockdowns will likely put a new drag on economic growth during and beyond the third quarter. So how will it affect the economy?

First of all, lockdowns limit mobility. Figure 2 illustrates the steep drop in mobility in Australian society. Last time the mobility levels were this low was more than a year ago. Lower mobility levels and more restrictions lead to lower consumer demand. Especially hotels, restaurants and recreation parks will feel the pain of a loss in demand, either because they are forced to close or because people are afraid to get infected. This is illustrated by figure 3, which clearly shows a large decrease in service sector activity.

Furthermore, lockdowns have increased the pressure on business over the past month. Falling demand may have forced them to lay people off or have people work fewer hours. The government introduced a new federal program called disaster payment, which compensates workers for lost hours of work as a result of lockdown measures. As such, the government tries to prevent a larger drop in demand as a result of decreasing household income. The increasing search interest for disaster payment, as illustrated by figure 4, is an early indication that a growing number of workers is interested in the disaster payment, because they are experiencing a reduced number of work hours, or they feel lower job security as result of the lockdowns. This is likely an early signal of rising unemployment, which will drag on the economic recovery in the remainder of the year.

Based on the arguments explained above, we have revised our economic forecast for 2021 downwards (see Table 1). The economy will take a step back in Q3 and show lower than anticipated growth in Q4, due to the economic spillover effects of the current wave of, and projected, infections. Nonetheless, we expect the economic impact of this second wave to be more muted than seen in the past year, as society has largely found a way of dealing with Covid-19 restrictions. Furthermore, we expect a strong rebound when restrictions are lifted, as we have experienced before.

The RBA decided to maintain the reduced pace of asset purchases (AUD 4bn a week) in August instead of announcing an increase. This seems counter-intuitive. However, the minutes of the monetary policy meeting reveal that the board judges that additional bond purchases will have a greater impact at a later stage, when resumption in economic activity is well underway. According to the board: ”fiscal policy is a more appropriate instrument than monetary policy for providing support in response to a temporary, localized reduction in incomes”. As described, Figure 4 not only confirms the need for these temporary fiscal measures by the government but also implies higher unemployment in the coming months, which is exactly the opposite of the RBA’s desire to see a tighter labor market in order to support, lower than desired, wage growth. Surprisingly, the unemployment rate fell last month, but underlying figures, like the participation rate, hours worked and the underemployment rate reveal a more grim outlook. Altogether, we expect the Central Bank to employ a dovish tone again in the coming months. Especially when we take into account its warning that the RBA “would be prepared to act in response to further bad news on the health front”. This has obviously been the case since their meeting on August 3.