We assume that
- virus numbers stay suppressed as vaccine logistics steadily improve, so state borders remain mostly open and domestic restrictions gradually ease as vaccines roll out
- vaccines achieve the equivalent of herd immunity by late 2021/early 2022, but
- international borders re-open very gradually. For Australia, some form of quarantine will remain for some incoming travellers for some time. That keeps international travel (both inbound and outbound) pretty weak in 2022, and it may not return to pre-pandemic levels until 2024.
The global rebound looks increasingly solid, with
- vaccinations mostly beating mutations, ushering in a virtuous circle as COVID dangers fade through 2021 in developed nations and then through 2022 in the rest of the world, and
- as governments and central banks keep supporting the recovery to an extent they failed to do after the GFC. The Asia-Pacific fought off COVID better than most, and so it has led the global recovery. But the US is set to soar, and even the hard hit UK will ride its vaccine rollout. Europe may be slower, as it has fumbled its vaccines. Yet that’s a temporary setback: and vaccinations will eventually be a great leveller across economies.
Australia’s economy is already roaring back. Remarkably, living standards grew faster through 2020 than their average gains over the past decade – partly because the world is giving us a pay rise despite the recession (via prices for iron ore, LNG and thermal coal), and as it is giving us a cost cut too (via lower interest rates on our foreign debt). Yet the big bump from Australia’s reopening economy will gradually ease from here, as emergency government assistance continues to fall away. That will see further catch up growth become more of a grind.
Central to the speed of that grind will be the ongoing tug-of-war between mutations and vaccinations. But we continue to see vaccinations as the more likely winner of that struggle. So although some pain will linger – particularly as the mutations mean international borders will remain less-than-fully open for longer – most of Australia’s economy looks on course to be close to pre-pandemic normal by Christmas 2021.
Markets think inflation is coming. Some prices have jumped back – oil, for example, is back at pre-pandemic prices. However, those are mostly one-offs. A sustained lift in inflation requires a conga line of things to happen. To begin with, unemployment and underemployment have to fall enough to give pricing power to workers (to hike wages) and businesses (to hike prices). Yet unemployment is going to take quite some time to get down to the point that it gooses wages, wage agreements will take time to reflect stronger bargaining power, and prices will take time to fully reflect faster wage momentum. So don’t worry too much if you’re hearing inflation is a threat. Have a Bex and good lie down. It’s gonna take time and a whole lot of spending money before inflation is back.
Markets are increasingly banking on a huge global recovery, so they’ve bid up long-term interest rates. But that’s a vote of confidence. Even if demand does rapidly recover the huge ground it lost during COVID, it will take years to fully pass that into wages, and even more time before central banks finally raise rates. In fact you’ll see the first lift in official rates a mile off – as you’ll see it in accelerating wages long before you see it in the decisions of central banks. For Australia, that still says 2024 before any increase in the RBA’s 0.1% cash rate. Meantime, we see the huge spending of the Biden administration driving a lift in the $US, and a corresponding easing in the $A.
The job recovery is already really remarkable. Don’t lose sight of that over the next few months: things will be cloudy, with many stories of individual business closures and job losses amid the end to JobKeeper. Even so, we forecast overall jobs to hold up amid ongoing momentum in the wider economy. Unemployment is already under 6%. And although it won’t fall further for some months now that JobKeeper has ended, we forecast it at 5.6% by late 2021, 5.3% by late 2022, and 5.1% by late 2023. That’s not perfect, but it’s still great.
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