What's next for the Australian, Asian and global economies?
Like many other economies, Australia has benefited from decades of global trade and investment, which the arrival of COVID-19 has severely curtailed. We examine the predictions of leading analysts.
While unemployment may be the principal domestic concern, the changing global context of the COVID-19 pandemic will also shape the Australian economy for years to come. This includes the long-term impacts of closed borders preventing migrants from joining the labour force, putting a dampener on both economic growth and net migration numbers.
Despite a COVID-constrained economy, historically low interest rates and rising unemployment, Australia is proving better placed than most to recover from pandemic-induced recession. While an earlier article looked at the key factors influencing Australia’s economic recovery from recession, here we look at the bigger global picture and potential reopening of both borders and economies in 2021 and beyond.
According to a Deloitte Access Economics Business Outlook report – Down, but not out, the Australian and world economies - what comes next? – released in October 2020, most of the globe has bungled its health and economic responses. The resultant downturn has been deep and, it predicts, the recovery will be slow and patchy. While Australia is in recession, Deloitte Access Economics partner Chris Richardson says this must be kept in perspective.
“We’ve held the economy together using Band-Aids and that’s worked brilliantly. But the Band-Aids are starting to come off and the virus remains an unpredictable enemy that could throw further spanners into the works,” he says.
“So, although this recession arrived fast, it will leave slowly. Even with extra tax cuts for families and businesses, we still face a big cash crunch between now and end-March 2021 as JobKeeper and JobSeeker are dialled back, as money from early access to superannuation dries up, and as a range of mortgage and rent deferrals run out.”
Smaller, older Australia
Despite the International Monetary Fund (IMF) forecasting Australia's economy to do much better than most advanced economies, the damage is substantial and will have lingering effects. Like many other open economies, Australia has benefited from decades of increasingly liberal global trade and investment, which the arrival of COVID has begun to limit.
According to a Lowy Institute report – The Costs of COVID: Australia’s Economic Prospects in a Wounded World – it will take time before business investment plans can be confidently implemented, households become less cautious, foreign students once again enrol in Australian institutions, international tourists return, migration restarts, and overseas travel resumes.
“Global output will, for years to come, be lower than it would otherwise have been. On IMF forecasts, the economic contraction in the United States, the whole of the Euro area, the United Kingdom, and Canada will be twice that of Australia,” the report found.
“The arc of our nation’s history is bending before our very eyes – a smaller and older Australia awaits us,” Deloitte’s latest quarterly business outlook reported. “That isn’t necessarily bad, but it’s definitely big. It will reshape the nation’s future in a bunch of ways.”
East Asian recovery
In terms of the region, the damage has been less deep in much of East Asia, with Taiwan and Vietnam the standouts, South Korea tracking well and China staging a remarkable recovery. This should mean the impact for Australia of lower global demand and production is mitigated, since three-quarters of its goods exports are to East Asia.
“While world output will contract nearly 5 per cent in 2020 on IMF forecasts, developing Asian countries will contract by less than 1 per cent. Korea’s output will contract somewhat less than Australia’s, while Japan’s is somewhat more. China’s output, on these forecasts, will actually increase – a projection already supported by its economic growth in the second quarter of 2020,” concluded the Lowy Institute report.
On the other hand, the COVID-19 pandemic has indicated a further deterioration in Australia’s engagement with China, which may be further exacerbated by the US-China trade and technology war.
Finally, even though Australia is exiting the pandemic with lower government debt than many other advanced economies, with its central bank acquiring less of this debt than other advanced economy central banks, Australia cannot escape the consequences of increased government debt elsewhere.