What is the current macroeconomic environment?
Global economic environment
- COVID-19 is in 220 countries/territories with 63,965,092 confirmed cases and 1,488,120 confirmed deaths (WHO, 4 December).
- To recap, the IMF projects global growth to fall by 4% in 2020, a less severe contraction than initially expected. Advanced economies are projected to fall nearly 6% on average and emerging markets and developing economies by over 2%. China is the only major economy expected to experience positive growth in 2020, increasing by around 2% (IMF, 16 October).
- Monthly wages fell or grew more slowly in the first six months of 2020 as a result of the pandemic in two-thirds of countries with official data, with women and low-paid workers disproportionately affected. Increases in average wages in other countries were largely the result of job losses among large numbers of lower-paid workers (ILO, 2 December).
- In a recent report, the OECD notes that COVID-19 has amplified all aspects of digital transformation. By mid-2020, 24 OECD countries had a national AI strategy, with strong emphases on adoption and skills, and 5G commercial services were available in select areas in 22 OECD countries (OECD, 27 November).
- Following two quarters of consecutive contraction, the US grew by over 7% in the third quarter (BEA, 25 November).
- Likewise, after two quarters of contraction, the UK grew by nearly 16% in the third quarter (ONS, 12 November).
- Similarly, GDP in the euro area and EU rebounded by 13% and 12% respectively in the third quarter (Eurostat, 13 November).
- Interest rates: The Eurozone remains at 0%, China at 3.85%, Japan at -0.1%, the US at 0.25%, the UK at 0.1%.
Global assistance measures
- Currently, almost half of total global cases have occurred in just four countries (US, India, Brazil, Russia), as have almost half of total deaths (US, Brazil, India, Mexico). Almost 70% of cases and deaths are in the top 10 countries. Nevertheless, many countries and territories have shown COVID-19 can be controlled, even without a vaccine – through investment in testing, clinical care, health worker protection, contact tracing, cluster investigation and quarantine (WHO, 27 November).
- Vaccine development is progressing at an unprecedented rate. In November, it was announced the Pfizer/BioNTech COVID-19 vaccine candidate had an interim analysis efficacy of over 90%, the Moderna candidate had an efficacy of more than 94%, and the Oxford and AstraZeneca candidate had an efficacy of between 62% and 90%, depending on dosing regimens.
- The WHO lists 48 COVID-19 candidate vaccines in clinical evaluation, with another 164 candidate vaccines in preclinical evaluation (WHO, 12 November).
- For a comprehensive and current policy response tracker, see IMF, 4 December.
Australian economic environment and assistance measures
- 27,939 confirmed cases and 908 confirmed deaths (Department of Health, 4 December).
- Restrictions continue to differ between states and territories. In Victoria, a roadmap for reopening is being implemented after an outbreak triggered heightened restrictions in June. In South Australia, fears over another outbreak led to a brief lockdown in November.
- Australia has recorded economic growth for the first time since March, with GDP rising 3.3% in the September quarter, indicating that a recovery is underway (ABS, 2 December).
- Reflecting this, household consumption increased 8% in the September quarter, after a 13% fall in the June quarter (ABS, 2 September).
- In October, the unemployment rate increased by 0.1 percentage points (pts) to 7%. However, actual employment also increased by 178,800 people (1%) between September and October and hours worked by 1% (ABS, 19 November).
- Considering those who have lost employment, left the labour force or experienced zero working hours, the effective unemployment rate fell in October, coming down from 9% to 7% (Treasurer, 30 November).
- Company gross operating profits rose 3% and wages and salaries rose 2% in the third quarter (ABS, 30 November).
- Business confidence and revenue outlook is improving, with 24% of businesses reporting an increase in revenue in November compared with 16% in October, and the proportion reporting economic uncertainty as a factor influencing capital expenditure has fallen from 59% in August to 29% (ABS, 20 November).
- In a $1 billion manufacturing agreement, a new vaccine manufacturing facility will be developed in Melbourne to secure Australia’s long-term supply of critical health products including pandemic influenza vaccines and antivenoms (Prime Minister, 16 November).
- The JobSeeker Coronavirus Supplement has been extended from Christmas until the end of March 2021, with the supplement falling from $250 to $150 per fortnight next year (Prime Minister, 10 November).
- The interest rate remains at a historic low of 0.1% following a cut by the RBA in early November.
An overview of how the macroeconomics of COVID-19 impacted Australia’s key economic indicators in 2020
The unprecedented pandemic has disrupted global supply chains and major Australian sectors, interrupted travel and migration, and impacted huge segments of the global and Australian workforce. Nevertheless, as we near the end of the calendar year, there is also evidence that Australia is beginning to recover from the worst of the economic shock of COVID-19.
Expected and observed impacts on key economic indicators
- Economic activity: The Australian economy entered its first technical recession in nearly 30 years as a result of the pandemic. GDP contracted by 7% in the June quarter, after a fall of 0.3%. in the March quarter.
- While September quarter economic activity rose 3.3%, through the year (Sep 19 to Sep 20) GDP fell 3.8%.
- Looking at the 2019-20 financial year, the Australian economy contracted 0.3% from the impacts of not only the pandemic, but also the bushfires. In 2019-20, Gross State Product (GSP) contracted in South Australia, Queensland, New South Wales and Victoria.
Source: ABS, Australian National Accounts: State Accounts (November 2020).
- Production by sector: Through the year (Sep 19 to Sep 20), production also fell significantly in many major sectors. The biggest falls were experienced in Administrative and Support Services (-22%), Transport, Postal and Warehousing (-20%), and Accommodation and Food Services (-20%).
- Major contractions were also experienced by Arts and Recreation Services (-16%), Agriculture, Forestry and Fishing (-9%) and Rental, Hiring and Real Estate Services (-9%), while Mining (-2%) and Manufacturing (-2%) experienced milder contractions.
- Employment: The effects of COVID-19 on the national labour market were severe. The official unemployment rate increased from 5.2% in March to a high of 7.5% in July while the effective unemployment rate was close to 15% in April. Furthermore, hours worked in all jobs fell sharply in April by nearly 10% during the peak of restrictions across Australia.
Chart 1.1: Employed people, seasonally adjusted (2020)
- While the unemployment rate remains high, the labour market is steadily improving. Three-fourths of the sharp loss in total employed people experienced in April and May was recovered over the period from June to October. The participation rate has also increased from 63% to 66%.
- Exports: Many major export sectors of the economy were adversely impacted by the pandemic. For international tourism, overseas visitor numbers were down 28% in 2019-20 and overseas visitor spend was down 25%, a loss of over $11 billion on 2018-19.
- Universities Australia has estimated that $16 billion in higher education sector revenue could be lost by 2023 due to restrictions on international student travel.
- However, Australia’s agricultural trade has mostly continued unhindered by the pandemic, with export performance remaining strong.
- Similarly, Australia’s resources and energy exports reached a record high of $290 billion in 2019–20, supported by strong prices for gold and iron ore. Earnings over the next two years are expected to fall due to lower prices but currently remain robust.
- Federal Budget: Released on 6 October, the 2020-21 Budget introduced notable fiscal policy measures, including scheduled income tax cuts being brought forward, full value write-off on assets for eligible businesses, and a hiring credit scheme for eligible employers hiring workers on JobSeeker.
- Net debt is estimated to reach $703 billion this year and peak at $966 billion by June 2024.
- According to Treasury estimates in the Budget, GDP growth is expected to fall by around 3.75% in 2020, before growing by around 4.25% in 2021.
Australia’s future recovery and resilience
Science and technology have played a critical and publicly visible role in supporting the immediate response to the pandemic, including guiding the public health response, virus suppression, treatment and testing. It will continue to play a vital role in Australia’s economic recovery and long-term resilience.
- In the short term, the focus is on slowing the spread of COVID-19 and economically protecting Australian households and businesses, while funding vaccine development and related science.
- In the medium term, focus should shift to how science, technology and innovation can lead the Australian economy’s recovery. This should be about supporting the recovery of Australia’s core industries through improved health and safety measures, digitalisation, and other economic growth opportunities. Medium-term recovery opportunities involve deployment-ready technologies that could have positive economic impacts.
- In the long term, focus should shift to building a resilient economy and reducing Australia’s exposure to future shocks. Long-term resilience opportunities involve technologies that are often still in development and that demand further investment, technical and commercial testing, and scale up before their economic potential is fully realisable.
For further information
Dr Katherine Wynn
Lead Economist (SERVICES)
Disclaimer: This document contains general information only, and we are not, by means of this document, rendering professional advice or services. Before making any decision or taking any action that might affect your finances or business, you should consult a qualified professional advisor.