Are Australia’s economic fortunes in terms of recovering from the early stages of the COVID-19 pandemic coming to an end?
Australia’s economic performance, along with that of New Zealand and Taiwan, has been better than that of almost any other advanced economy. It is among only a few advanced economies where the level of real gross domestic product (GDP) and employment is higher than it was immediately prior to the onset of the pandemic in the first quarter of last year. While Australia did have a sharper rise in its unemployment rate than almost any other advanced economy apart from the United States, it also had a more marked fall in the unemployment rate since it peaked in about September last year than almost any other advanced economy.
[Source: IMF, Fiscal Monitor Database of Country Fiscal
Measures in Response to the COVID-19 Pandemic, April 2021 Corinna.]
Australia was able to achieve that good economic performance for two reasons. One, because Australia and New Zealand are isolated islands, the countries were far more effective in suppressing the virus than almost anywhere else in the world during a period when realistically there wasn’t any alternative strategy. Even with the recent upsurge in delta variant cases, Australia’s cases per million are minuscule compared with the United States, the EU, or India. There’s also a worrying upsurge that’s being reported in case numbers in Southeast Asia.
The other reason Australia and New Zealand have stayed ahead is both countries provided more fiscal support than almost any other advanced economy. Both the U.S. and the UK did more than Australia and New Zealand, but because they bungled the suppression strategy during the first 12 months of the pandemic, spending more didn’t deliver them better economic outcomes.
[Source: Coronavirus (COVID-19) Vaccinations]
This is important to how Australia and New Zealand will compare with other countries over the next 12 months in terms of economic performance. Since earlier this year, the less economically costly strategy of vaccinating as much of a population as quickly as possible became available — but Australia chose not to pursue it. The evidence is now becoming clear: although being vaccinated doesn’t stop people from getting or transmitting the virus, it greatly reduces the chance of them having to go to a hospital and dying.
As a result, countries that are now experiencing a surge of the delta variant but have vaccinated a large proportion of their populations aren’t having to shut down in the way that New South Wales, Victoria, and South Australia have been forced to do for the past few weeks. Because Australia consciously chose not to pursue a rapid vaccination rollout, it (and New Zealand) find themselves way behind other advanced economies in terms of the proportions of their population that have been vaccinated.
Whereas Canada has been successful in its vaccination efforts while being wholly reliant on imports, Australia chose to put almost all its eggs in the AstraZeneca basket. It did that partly because it was a lot cheaper and easier to store, but also due to a misplaced obsession with the notion of sovereignty based on the belief that the AstraZeneca vaccine could be manufactured within Australia. Hence, Australia would be less reliant on imports of the Pfizer and Moderna mRNA vaccines.
AstraZeneca’s vaccines have been slower than expected to become available, partly because of the EU’s rather unfriendly decision to block delivery of up to 3 million doses to Australia, but also because it’s taken longer to ramp up production within Australia than had been originally proposed. To some extent, Australia’s success in suppressing the virus probably bred complacency on the part of the population. It was quite a common occurrence to hear people saying, “There’s no COVID here. So why get vaccinated?”
It hasn’t helped that Prime Minister Scott Morrison originally said that it wasn’t a race, but the reality is it is a race against the virus, and when it comes to economic performance, it’s also a race against other economies.
Meanwhile, the poor messaging about the risks associated with the AstraZeneca vaccine have played into a very high rate of vaccine hesitancy in Australia. According to polls taken by YouGov and published on Our World in Data, Australia has a higher proportion of people who are unwilling to take the vaccine or uncertain as to whether they will take it than any of 12 advanced economies. That’s an extraordinary reflection on the unwillingness of the government to challenge that hesitancy and to educate people. New South Wales and Victoria wouldn’t be in the position they are in today — experiencing a significant loss of economic activity — if governments had been prepared to make vaccination mandatory for certain people, such as international flight crews.
[Source: Blavatnik School of Government, Oxford University]
The restrictions that Australians are now experiencing are stricter than those across advanced economies. The likelihood is that Australia will have this on and off until it gets an excess of 80% of its population vaccinated, which probably will not be before the end of the year.
Shane Oliver, Chief Economist at AMP Capital, estimated that the lockdown in greater Sydney costs about a billion dollars a week in terms of economic activity. The Australian economy’s GDP is about $40 billion a week. If you assume that in the absence of the lockdown real GDP might’ve grown by about 1.25% in the September quarter, if states continue to be locked down, Australia will likely see real GDP contract by more than 1% in the September quarter.
Another aspect of this is Australia’s very strict border closures, which bar citizens from leaving the country and restrict their ability to return from overseas. Australia’s population growth has slowed to its lowest point since 1916, when it was sending a lot of people to fight and die in Flanders and other parts of Europe. The border closures have had an underappreciated impact on the labour market.
[ABS, Labour Force, Australia, June 2021; Corinna]
On average, over the decade prior to the onset of COVID, the Australian civilian working-age population grew by about 26,000 a month. If an unchanged participation rate is expected, there will need to be at least 16,500 new jobs created a month to get the unemployment rate to fall. That’s what Australia did between the end of 2009 and the end of 2019. Although the unemployment rate fluctuated quite a bit over that period, it essentially went unchanged from 5.25% at the end of 2009 to 5.25% in the first quarter of 2015.
But since the closure of its borders in March last year, the civilian working-age population has grown at an average rate of about 6,000 a month with the inclusion of the June quarter, when more people left Australia than arrived in it. The significance of this much slower growth in the working-age population is that far fewer jobs need to be created per month to get the unemployment rate to fall.
Australia’s strategy of much more zealous border closures than any other democratically governed country sniffs of the protectionism that Australia imposed between Federation and the early 1990s. Protectionism effectively forces people in the country to spend money that they’d prefer to spend on imported goods and services instead on domestically produced goods and services, which supposedly turned Australia into a “manufacturing powerhouse” and created jobs. What it did, of course, was take us from having the highest per capita incomes in the world at the time of Federation to by the early 1990s being ranked about 26th in terms of per capita incomes.
In the period since the early 1990s, as Australia has moved away from that protectionist orientation of economic policy, it has gone back to being about twelfth in terms of per capita GDP. But it reverted to our old habits of forcing Australians to spend money at home they would prefer to spend abroad and welcoming the fact that that means that Australians face less competition for the jobs that are available so that the unemployment rate comes down.
Protectionism does give a short-term sugar hit, but if Australia persists with it, the risk is that after the borders are officially opened, governments may decide to keep the immigration intake at lower levels than it was pre-pandemic. If that happens, Australia will pay an economic price.
About Saul Eslake
Saul Eslake is one of Australia’s most prominent and experienced business economists with more than 30 years of experience in the Australian financial markets. He currently runs an independent economics advisory and consulting business in Tasmania. Prior to this Saul was Chief Economist – Australia and New Zealand at Bank of America Merrill Lynch and Director of the Productivity Growth Program at the Grattan Institute. Earlier in his career, Saul was Chief Economist at Australia and New Zealand Banking Group, one of Australia’s largest retail and commercial banks. He was also nonexecutive director of Hydro Tasmania, an electricity generator and retailer owned by the Tasmanian government. He was awarded an Honorary Doctor of Laws degree by the University of Tasmania in 2012.
This financial industry article is adapted from the GLG Remote Roundtable “Australia Economic Outlook in 2H2021.” If you would like access to events like this or would like to speak with financial industry experts like Saul Eslake or any of our more than 900,000 industry experts, contact us.
Subscribe to Insights 360
Enter your email below and receive our monthly newsletter, featuring insights from GLG’s network of approximately 1 million professionals with first-hand expertise in every industry.