Saying the year 2020 wasn’t a great one for the economy is a bit of an understatement.
Shops shuttered, businesses were forced to close or, worse, go bust, and unemployment hit 1 million people as sectors like hospitality and tourism were decimated.
But economist Chris Richardson, from Deloitte Access Economics, is upbeat about 2021 – so much so, his business outlook for the year is: “We got this.”
He expects Australia will see some important recovery this year provided vaccines start to be administered in Australia from next month, state borders remain mostly open and virus numbers remain suppressed.
So what are his key predictions?
Flying will resume, bringing students and tourists
Dr Richardson expects the much-talked-about “travel bubble” with New Zealand will finally expand to allow Australians to cross the Pacific Ocean “in coming months”.
“Broadening to cover much of the world by the end of 2021,” he said.
But just as with crises past, he believes it will take years – until 2024 – for Australians and the rest of the world to resume travelling like we were in 2019.
When it does, Dr Richardson says, “a return to global travel will likely lead to a big increase in Chinese tourism”.
Which is something our economy really benefits from.
Margy Osmond, the chief executive of the Tourism and Transport Forum, told The Business last year the average visitor from China spent $8,500 during their stay in Australia, compared to about $1,500 spent by local tourists.
The struggling education sector will also welcome the return of international students.
International education was worth about $37.6 billion a year to the Australian economy before the pandemic.
Despite some recent vaccine concerns, the United Kingdom, United States and Canada are predicted to have two-thirds of their population vaccinated by the middle of this year.
“It may be closer to October 2021 before Australia, the European Union, Japan, Russia, most of Asia’s tigers and Brazil achieve a similar rollout, with the rest of the world seeing their rollout timetable likely to spill into the start of 2022,” Dr Richardson said.
A key issue longer-term remains the extent to which business travellers return to the skies.
“Having had to substitute in-person meetings for video conferencing for many months, there may be a more permanent shift from businesses to save costs.”
Unemployment will improve slightly and slowly
Australia is one of just five nations (along with Taiwan, China, Vietnam and New Zealand) to enter 2021 “very-well-placed” according to Dr Richardson.
“COVID-19 numbers are very low, the vaccine news is excellent, confidence is rebounding, Victoria is catching up to the recovery already underway elsewhere, there are heartening developments in job markets, and China’s trade war with Australia has, so far at least, actually added to national income rather than hurt it.
“To be clear, although the damage of 2020 is winding back fast, it definitely hasn’t disappeared and it will linger.”
The economist said that’s because the enormous protection provided by the Federal Government (by way of schemes like JobKeeper) was being rapidly dismantled, the world economy was “a mess”, and the geopolitical backdrop for Australia looked more troubled than it had been for many years.
But, as with most things in life, it’s all about perspective.
“Australia has made many mistakes in juggling COVID but, so far, we’ve made fewer mistakes than most of the globe. You’d rather be here than almost anywhere else.”
In recessions of the past, job recovery was slow and some people who lost their jobs never worked again.
“Today’s job recovery isn’t one your parents would recognise,” Dr Richardson quipped.
“Although unemployment and underemployment will be much higher than they were pre-COVID, they’re also falling much faster than feared.
“And don’t forget the long-term benefits: you can see the impact of recessions for decades afterwards in the income and unemployment experiences of those who were young adults when the storm first hit.
“So the smaller the upfront pain, the less is the longer-term scarring.”
Nonetheless, July 2020 will be remembered as the month 1 million Australians were out of a job and unemployment peaked at 7.5 per cent.
“I forecast the unemployment rate to be back down to 5.5 per cent by mid-2023 and I don’t see unemployment returning to where it was when COVID hit – about 5 per cent – until the start of 2024,” said Dr Richardson.
While that’s still some years away, he says the fact the rate never got as high as the double-digit figures initially forecast is good news.
“I can’t put strongly enough how vital the containment of the unemployment rate has been. That’s true not just in the short-term, but also in terms of its implications for the broader health of the economy and its people in the longer-term.
“High unemployment is a particularly nasty problem to face because joblessness goes up much faster than it comes down. Even with all the good work that has been done, once the health side of this crisis settles, the scars on jobs and joblessness will linger for a while.”
Manufacturing will grow slowly
When global supply chains were severed by the pandemic, there was a lot of hype it would lead to a reversal of the slowdown in manufacturing in Australia which had been happening since the 1960s.
But Dr Richardson doesn’t think that will eventuate.
“2021 negatives will increasingly look more like those of a typical recession, with sectoral damage centralising in manufacturing.”
While demand for items like hand sanitiser, cleaning products, face masks and medical devices have helped the sector improve since the pandemic began, overall conditions remain weak.
“Manufacturing will grow slowly, as it has weak underlying fundamentals.”
The Government, keen to support the sector, has identified six key national manufacturing priorities across resources technology and critical minerals processing, food and beverage, medical products, clean energy and recycling, defence and space.
It’s investing about $1.5 billion into local manufacturing to shore up local production and strengthen supply chains for some products.
But the cost to make things here remains high and Australia has few people with the right skills.
“One difficulty many manufacturing businesses face is that even where the case for reshoring is strong, the domestic workforce cannot supply the engineering and technical expertise required,” Dr Richardson said.
“Businesses that successfully exploit the onshoring opportunity are likely going to have to rely on automation technologies, dampening any boost to manufacturing employment.”
Dr Richardson expects that while manufacturing might be taken out of China, it won’t necessarily return to Australia.
“Manufacturers may look to near-shoring to take advantage of the lower labour costs in developing countries like Vietnam and Indonesia that are closer to home.”
Doing that will shorten supply chains, diversify trading partners and still keep costs, like labour, low.
While the pandemic might not become the catalyst for growth the manufacturing sector was hoping for, Dr Richardson did not think Australia was alone in that fight.
“Manufacturing is also a shrinking share of China’s economy too.”
Interest rates won’t change – but government budgets will have to
COVID-19 saw the Reserve Bank crush the official cash rate to 0.1 per cent in 2020 and even though virus cases are low and vaccines are about to be administered in Australia, the long-term high unemployment rate will keep inflation and interest rates on a tight leash for years to come.
“For Australia, a key outcome [of COVID-19] is that it has smashed interest rates. They’d already been falling for decades, but we’d stayed a step ahead of the interest rate experience in the rest of the world,” Dr Richardson said.
“But not anymore. Interest rates are now roadkill in Australia too.
“The shift to very low interest rates for an extended period will help credit growth – and hence help the banks – while it will also generate some momentum for property services.
“We expect interest rates, globally and locally, to be nailed to the floor for some years yet.”
He said that meant the traditional methods to pull Australia out of recession – cutting interest rates coupled with a boost to government spending – are no longer an option.
“The facts have changed – and that means we Australians have to adjust to these changed circumstances. We’ll underperform as a nation if we don’t.
“We need to use the federal budget as a first line of defence in downturns. That’s not what we’ve done for decades, so there’ll be resistance to that idea.
“So, for the foreseeable future, budget policy has to be more agile than it’s been in times past.”
The recovery will be big
Just as Victoria’s recovery has beaten many expectations, so too will Australia’s recovery out of the COVID recession, according to Dr Richardson.
“Business conditions after vaccines will look very different to those before vaccines.”
He said because the downturn was so sharp and the impact so big, the opposite would happen on the way out.
“There’s a rapidly growing possibility that this recession – as deep as it’s been – will see a more V-shaped recovery than our current forecasts allow for.”
History shows Australia’s biggest periods of growth have followed economic downturns.
He says while recessions are terrible, it’s important to remember a downturn means there are, “unemployed people who can be employed again, empty shops and offices that can be filled, and businesses that can start to work to their full capacity again”.
“The bigger the downturn, the bigger the recovery. That’s an equation we all need to keep front of mind.”
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