Economic Outlook: 6 November 2020

What is the current macroeconomic environment?

Global economic environment

• COVID-19 is in 219 countries/territories with 47,930,397 confirmed cases and 1,221,781 confirmed deaths (WHO, 6 November).
• In its latest World Economic Outlook, the IMF projects global growth to fall by 4.4% in 2020. This is less severe than the June update, which projected growth to fall by 4.9%. The revision was driven by better-than-expected second quarter GDP results, mainly in advanced economies, with economies improving sooner than anticipated after lockdowns were scaled back in May and June, along with indications of a stronger third quarter recovery (IMF, 16 October).
• However, this IMF projection is surrounded by large amounts of uncertainty. Should COVID-19 have a resurgence, progress on treatments and vaccines be slower than expected, or global access to them remain unequal, economic activity could be lower than expected (IMF, 16 October).
• GDP in the US rose by 7.4% in the third quarter of 2020, a strong rebound compared to the 9.5% quarter-on-quarter fall in GDP in the second quarter of this year (BEA, 29 October).
• Similarly, in the third quarter, GDP increased by 12.7% in the euro area and by 12.1% in the EU compared with the previous quarter (Eurostat, 30 October).
• China’s economy grew by 4.9% in the third quarter, after growing 3.2% in the second quarter (SCMP, 19 October).
• 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

• While several countries have successfully brought down transmission levels, many countries in the northern hemisphere have experienced a concerning rise in COVID-19 cases and hospitalisations, with intensive care units filling to capacity in some places, particularly in North America and Europe (WHO, 26 October).
• Near-term global financial stability risks have been contained, as unprecedented policy responses to the pandemic have helped to prevent adverse financial feedback loops and maintained the flow of credit to the world economy (IMF, 13 October).
• The WHO lists 44 COVID-19 candidate vaccines in clinical evaluation, with another 154 candidate vaccines in preclinical evaluation (WHO, 19 October).
• For a comprehensive and current policy response tracker, see IMF, 6 November.

Australian economic environment and assistance measures

• 27,633 confirmed cases and 907 confirmed deaths (Department of Health, 6 November).
• 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.
• To recap, the 2020-21 Federal Budget was released on 6 October. Notable changes include 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.
• In seasonally adjusted terms, in September, the unemployment rate increased by 0.1 percentage points (pts) to 6.9%. The youth (aged 15 to 24) unemployment rate increased 0.4 pts to 14.5% (ABS, 15 October).
• Considering those who have lost employment, left the labour force or have experienced zero working hours, the effective unemployment rate was 9.3% in September (Treasurer, 17 September).
• Following Standard & Poor's reaffirming its AAA credit rating, Australia remains one of only nine countries to retain a AAA credit rating from all three credit rating agencies (Treasurer, 20 October).
• Fewer businesses reported a decrease in revenue in October (31%) compared to July (47%) (ABS, 22 October).
• Fewer businesses reported a decrease in the number of employees (7%) compared to July (13%). Approximately one in five medium and large businesses reported an increase in the number of employees, compared with 6% of small businesses. (ABS, 22 October).
• According to the latest household data, around one in three Australians with a job worked from home most days in September compared with 12% before COVID-19 restrictions began in March (ABS, 13 October).
• The Reserve Bank of Australia (RBA) reduced the interest rate from 0.25% to 0.1% to further “support job creation and the recovery of the Australian economy from the pandemic” (RBA, 3 November).
• Further, the RBA has announced a $100 billion quantitative easing program to purchase longer-dated government bonds over the next six months to lower interest rates across the economy (RBA, 3 November).

How might macroeconomics impact the value of Australian science and technology?

With a slowing economy and the recent impacts of COVID-19, innovation is now more important than ever. Science and technology innovation helps improve productivity, can provide social and environmental benefits, builds resilience, and enhances international competitiveness.

Expected and observed impacts on the value of science and technology

• The recent Federal Budget provides a number of science and technology innovation-related items, including an additional $2 billion into the Research and Development Tax Incentive, $1 billion to universities to support their research activities, as well as $459.2 million to CSIRO to address the impact of COVID-19 on its commercial activities.
• Further, the Budget expands on the Government’s announcement of $1.5 billion to support the Modern Manufacturing Strategy and its $1.9 billion investment package in future technologies to lower emissions.
• According to the latest available data from the ABS, Gross expenditure on R&D (GERD) – which represents the total expenditure devoted to R&D by the Business, Government, Higher Education and Private Non-Profit sectors – amounted to $33,062 million in 2017-18 (ABS, 20 September 2019).
• As shown below, GERD as a percentage of GDP declined from around 2.3% in 2008-09 to 1.8% in 2017-18.

Source: ABS, Research and Experimental Development, Businesses, Australia (2019).

• For comparison, the OECD average in 2017 was 2.3%, and the top five OECD countries (Israel, Korea, Sweden, Switzerland, Japan) spent on average 3.8% (OECD data).
• According to the most recent data from 2016-17, only 2% of innovation-active firms in Australia cooperate on innovation activities with higher education or government institutions, which ranks it last on this measure among OECD countries (OECD data).
• An AlphaBeta report found that business expenditure on R&D has declined by over 30% since its peak in 2008-09, mostly as a result of macroeconomic factors such as the mining cycle shifting from development to production (Office of Innovation & Science Australia, January 2020).
• Before COVID-19, almost a third of Australian firms invested in some form of innovation, while just 5.8% of firms invested in R&D. Of the firms that invested in R&D, four in five spent more than half their innovation budget on non-R&D activity (e.g. purchasing new technologies, IP acquisition, and innovation-related training) (Office of Innovation & Science Australia, January 2020).

Maximising value from innovation

The recently released CSIRO Value of science and technology report demonstrates that there are plenty of opportunities for firms to enhance how they realise greater value from their investments.

• Strengthening collaboration: Stronger connections between researchers and entrepreneurs across the innovation cycle can improve the development side of R&D, share the risks, reduce the barriers to commercialisation and promote wider applications and impact of research. Australian businesses can also position themselves in high-value niches within global value chains and extend overseas partnerships by actively forging international relationships and contributing to international research efforts.
• Mission-led innovation: Businesses, in collaboration with research organisations and government, can create purposeful, impactful and strategically balanced approaches that better encourage investment in innovation. These approaches can encourage greater investment and more efficiently allocate existing investment. They can also capitalise on emerging market and technological opportunities in areas of national advantage.

• Culture shift: Australia can benefit from cultivating a healthy culture of risk-taking, curiosity and a willingness to learn from failure in all parts of the economy and community. Such a cultural mindset can support greater entrepreneurship, experimentation and innovation. Ensuring a robust, forward-thinking mindset in Australia’s innovation system also requires a fundamental cultural shift from a siloed ‘commodity culture’ to a culture based on strong relationships and a value-added, growth focus.

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.