Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist
Let’s assume for a moment that we are able to contain the outbreak in Victoria and any clusters in New South Wales in the coming weeks. Throw in also the possibility of an effective vaccine emerging, and there’s good cause for optimism about the prospect of life returning to a new normal sometime next year. I’m going to stress the word “new”, however, because while we’ve been hiding out, working from our kitchen tables, the world has changed. Here are a few aspects of our world and our economy where I think the effects of the coronavirus will play out for years to come:
Get used to low interest rates
Even before the crisis we were talking about an interest rate environment that looked set to be lower for longer. Thanks to rising unemployment and decreased spending, spare capacity is likely to linger in the economy for the foreseeable future. Despite the Reserve Bank’s expansionist monetary policy, we may be four to five years away from the point where enough of that stimulus starts to enter circulation such that rising inflation puts upward pressure on interest rates.
More government intervention and greater public debt
Much of the workload in keeping the economy afloat through the crisis has come from the Federal Government’s balance sheet, with fiscal stimulus this year current scheduled to be around $160 billion or 8% of GDP. Most of the measures undertaken as part of this package are designed to be switched off, in theory as the economy recovers, currently scheduled by the end of September. The government will face pressure to extend that date for a number of initiatives, in order to taper the stimulus and avoid a fiscal shock. Regardless of the action it takes, those programs that do continue, combined with the ongoing need for management of hard-hit sectors such as tourism and aviation will necessitate a heavier hand for the government in the economy going forward. Coupled with this, of course, will be a large bill, in the form of public debt to be paid back over the course of decades (albeit to ourselves!).
Lower immigration pulls the plug on economic growth and housing demand
The engine of Australia’s economic growth has increasingly been our increasing population, fuelled by immigration. The closure of our borders has brought that to a grinding halt, with net overseas migration projected to fall from 240,000 in the 2018-19 financial year to just 40,000 by 2020-21, for an overall loss of almost 200,000 migrants.1
Immigration has been an especially important factor in housing demand, which is likely to decline by about 80,000 dwellings per year as a result of lower levels of migration. All other things being equal, it’s questionable whether this will overly affect local living standards given that the economy was struggling to generate positive GDP on a per-capita basis even in the lead-up to the crisis.
Globalisation on the ropes
As we’ve seen already, the pandemic has struck a further blow at our globalised economy, with many companies re-examining the extent to which they’ve off-shored their supply chains. Even if the pandemic subsides, there’s no guarantee that this situation will ease over the short term, particularly in the shadow of a US Presidential Election. If the Democrats win, they may seek to de-escalate tensions with China; if Trump is successful in seeking a second term the tug-of-war between corporate interests and the President’s protectionist instincts will continue, and we know which side has had the better of that contest over the past four years.
The coronavirus may actually strengthen European unity
Rumours of the death of the Eurozone have been greatly exaggerated for many years now, and despite the imminent divorce with the United Kingdom (more a marriage of economic convenience than a genuine meeting of minds) the EU seems to be drawing closer in the face of the pandemic, recently moving towards the common issuance of bonds2 for the first time in history. It’s not unreasonable to think this might be the trend from this point forward, particularly given recent US ambivalence to its traditional partners in the region.
An uneven local recovery
Going forward, the effects of the pandemic on the Australian economy are likely to be tiered, with many companies (and markets) benefiting more rapidly from a return to normality whilst a large number of unemployed and those who have left the workforce struggle to find their place in the new status quo, bearing the brunt of higher inequality and social dislocation. Caught in the middle will be the majority of those still employed, for whom real wage increases will be more constrained.
Real downsides to business models that rely on in-person interactions
The pandemic has greatly accelerated the infiltration of online services in areas such as retail and workplace interaction, and even as the physical world continues to re-open we can expect that this won’t be completely reversed. In particular, the long-term effect of widespread videoconferencing will have significant implications for airline routes and CBD hotels that generate much of their revenue from corporate travel. It may all mean the death of the city as we know it and a renaissance in regional centres.
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