15 September 2021

The COVID news in a number of the states (and territories) over the past few weeks hasn’t been good. The overseas experience suggests that at some stage we would be confronted with another virus ‘wave’. Almost all countries in the OECD have been hit by at least 3 waves (some are currently experiencing their fifth). In most countries, the number of cases was lower in the first wave. The higher numbers in subsequent waves likely reflect that the virus spread quickly during periods when restrictions were less strict, the impact of ‘lockdown fatigue’ and the increasing contagiousness of the virus as it has mutated.

The lockdown(s) are having a significant economic impact. Since the end of the nationwide shutdown in Q2 last year, analysts were consistently surprised by the strength of the economic rebound. Now, most forecasters are surprised by the length and severity of the lockdowns. The result is that Q3 GDP forecasts keep getting downgraded. How the economy performs in the September quarter will depend upon the severity, spread and length of the lockdowns.

The lockdowns have become increasingly stringent in NSW. And they have generally started tough in the other states that have had to endure a shutdown. One gauge is the Google mobility data that shows the time spent at home. In NSW and Victoria, that index is back to the level last seen during the nationwide lockdown of last year. The amount of time spent at home by West Australians right now is almost at pre-COVID levels. Queensland is somewhere in between.

The proportion of time spent at home right now in Australia is below what occurred in Italy and the UK during their significant outbreaks last year. Time spent at home in other countries has declined over this year in line with rising vaccination rates (and often despite rising case numbers). The Google data is consistent with the index calculated by Oxford University on the stringency of government regulations. Oxford University suggests that Australia has been about the middle of the pack in terms of stringency of regulations.

The NSW Government has announced that the lockdowns will last longer than the end of this month. The ‘waves’ across OECD countries typically last for 2-5 months. This suggests that this wave may finish sometime between September and November. Rising vaccination rates and more stringent restrictions on movement should help to break this wave.

The international experience suggests that at some stage, new cases will rise again once restrictions are eased. This will be despite higher vaccination rates. There will still be a sizeable minority of the community unvaccinated. And the evidence appears to be that vaccination reduces, but does not stop, transmission. Governments (and forecasters such as the RBA) have acknowledged that will likely result in periods of tightened restrictions, albeit nowhere near as stringent as they have been over the past 18 months. This has been the case even in the US where some states have again made mask-wearing mandatory in some public indoor settings and proof of vaccination is required when entering restaurants as a new virus wave appeared. But the US economy has remained largely open.

Negative third quarter, the start of the economic bounce back in the fourth quarter

The Australian economy entered this lockdown in good shape. In the second quarter, firms indicated that they had not seen business conditions as strong for over 25 years. Consumer confidence was strong, with households indicating that jobs were plentiful. The unemployment rate in July was 4.6%, the lowest level since 2008.

Things have got worse since the July employment report. The lockdown has lasted longer in Sydney and extended into regional NSW and Victoria. In the coming months, we should expect some decline in jobs growth and some rise in unemployment. And even the July jobs report showed some impact of the July shutdown. There was a decline in the number of hours worked and in the participation rate. This was most notable in NSW, where there was a fall in the number of employed.

Economic growth in 2022 and 2023 should be strong

The consensus is that once Australia emerges from this wave, the rebound of economic growth will be strong. Some positive factors supporting the economy include very supportive fiscal and monetary policy. There is plenty of infrastructure and residential construction work in the pipeline. Firms are still indicating that they have decent sized Capex Budgets. There is a mountain of household saving that could be spent. A sharp rebound in the economy once restrictions have been eased has been the experience both in Australia and overseas.

When the economy reopens, there should be a snap-back in demand (including for workers). The likelihood of intermittent restrictions may impact some sectors of the economy (such as Recreation, Transport and Accommodation and Food Services) for parts of next year.

But without the stringent lockdowns that Sydney and Melbourne are currently experiencing, a return to the conditions experienced in June is expected, when the critical economic problem was not a lack of demand but a lack of supply. Globally, there continue to be supply-chain problems as economies reopen following their shutdowns. These will take some time to be cleared, not the least because restrictions remain in place in many countries. One of the most significant restrictions remains the movement of people between countries. This is a particularly big issue in Australia.