Deloitte Access Economics’ business outlook on boosters versus omicron

Despite ongoing mutations, booster rates build sufficiently to keep COVID deaths sufficiently low that lockdowns are not lengthy or large scale, and COVID treatments for those who get the virus continue to improve and their supply builds.

While fits and starts, migrant, student and tourist numbers rise through the course of 2022 and get closer to pre-pandemic rates by 2023 or 2024.

The tug-of-war between vaccinations and mutations lingers with new strains, with signs global recovery is topping out and lack of vaccinations among poor nations deepening risks.

So progress against COVID, or the lack of it, remains central to the global economy.

Yet vaccinations and other treatments are still the likely winners, aided by the fact that businesses are getting better at living with COVID. That will leave global growth patchy in 2022, with the greatest success likely to go to nations whose populations are triple vaxxed.

Meantime, China is amid a sharp slowdown. That already means the net impact of global economic developments on the Australian economy is turning down once more.

Australia is now much more match fit for fighting COVID: we’re well vaccinated, we’ve got the hang of juggling lockdowns and other COVID challenges, and we’re cashed up with dollars left over from when the pandemic meant that money couldn’t be readily spent.

That combination spells resilience and recovery.

Omicron not the last mutation

But Omicron has gone vertical, and it won’t be the last mutation for us to fight. China’s economy has softened in ways that particularly challenge us.

And the markets wrested control of the cost of money away from the RBA, notably raising the cost of two- and three-year fixed rate loans at a time when borrowings have leapt.

The good outweighs the bad. It has been doing that for a while – for all its challenges, 2021 recorded the fastest growth in the Australian economy since 2007, making it the second fastest growth seen in the past two decades.

Deloitte Access Economics sees 2022 as a similar story, with Australia’s growth remaining above average as pandemic damage to the economy continues to be repaired.

Yet risks remain high: COVID isn’t done with us.

SMEs raise prices to meet costs of operations

Supply snarls have given businesses more pricing power than they’ve had in decades. Add higher energy prices and a weaker $A, and consumer prices have spiked. But so far prices have grown faster than wages. Unless wage gains accelerate a lot, inflation will ease.

Yet there’s less reason to believe wages will accelerate fast in Australia. And wage inflation moves slowly, in part as most workers are on agreements that last two or three or four years. Both wage gains and consumer price pressures will sustainably lift.

Price pressures remain mostly temporary, and central banks remain mostly cautious. So although monetary stimulus is being wound back, that won’t happen too fast, and it won’t end in rates similar to those of times past. That’s the story in Oz too.

Our inflation risks are less: we will pick up a deflationary impulse from China’s slowdown, we haven’t suffered the Great Resignation seen in the US, price increases here have so far only been in a narrow range of products, and most wage agreements are struck over years.

That gives the Reserve Bank the luxury of time. And it really should take advantage of that amid today’s highly uncertain environment. If it does, then that should keep the $A lower against the currencies of nations with more gung ho central banks.

Effect of the pandemic on the job market

Few things have generated much joy during the COVID era, but Australia’s job performance is one of them. Each time the nation has managed to get its nose ahead of COVID, the job market has exploded with the exuberance of a Labrador puppy taken for a walk.

Even better, soaring job vacancies says there’s petrol left in the tank. COVID permitting, we see the unemployment rate flirting with 4% by end-2022.

Popular opinion sees the secret sauce of our job joy as closed borders. And it’s true that closed borders help explain huge vacancies across IT, farming, retailers and hospitality.

Yet that’s just a one-off effect – ongoing migration generates as many jobs as it fills (in the exact same way that having children eventually generates as many jobs as it fills).

Rather, the key driver of Australia’s exuberant job rebounds has been the pedal to the metal support for the Australian economy of governments and the Reserve Bank.

Note that the forecasts set out in this issue of Business Outlook already assume a bunch of pain from Omicron, including an allowance that up to one half of the workforce spends an extra week being unable to work in the first half of 2022.

Federal and state budgets are in trouble. As we’ve said for some time, that isn’t because of the pandemic. Yes, COVID has been costly, but those costs are temporary. But while we were glued to our daily dose of the Gladys and Dan show, the cost of running Australia rose.

That’s because (1) we’ve underspent on social services for years, so the budget in May 2021 added an ongoing $15 billion a year in social spending, and the budget update at end-2021 added a further $10 billion a year (mostly on the NDIS).

And at the same time (2) the world has become a more dangerous place for Australia. That makes for more expensive defence costs too. Allowing for these building cost pressures, the federal budget looks likely to settle at ongoing annual deficits of over 3% of national income.

Industries – what next?

2022 may well avoid large and lengthy lockdowns, but Omicron’s rise will keep our sectoral landscape one of low touch, low trust and low density compared with pre-pandemic norms.

So although recovery in tourism, hospitality, admin services, and arts and recreation will continue, it may be patchy and partial.

And COVID is running riot in ways that are playing merry hell with a bunch of ‘high touch’ industries: including trucking and distribution, as well as supermarkets and retail more widely. That pain is probably temporary, but it is huge.

Yet the bad news for those sectors will see matching good news for sectors that fight the pandemic and protect the economy – the likes of the public sector, finance and health will stay stronger for longer during 2022 because they’ll need to.

While another year of record harvests means farmers are doing even better.

States and territories – what next?

Recent years saw Australia splintered into states, but 2022 will start to see the return of the nation. The things that divide us – borders, COVID fighting policies and the like – will become less important as we learn to live with the virus.

Economically, that will show up as the states hardest hit by COVID (NSW and Victoria) closing the gap with those that have seen their economies prosper (Tasmania, West and South).

The ongoing fight against Omicron will determine the speed at which Australia reintegrates, and the best economic evidence of that will be seen in consumer spending – where NSW and Victoria dropped off the pace during lockdowns.

Looking longer term, the increasingly long running nature of the COVID crisis suggests that an echo of some patterns (bigger states struggling and smaller states prospering) will linger on.

By the way, the pain of COVID on economies across different regions to date is almost exactly explained by the size of the state. The smaller the state, the better it has done.

If you’re silly enough to think that state outcomes have been driven by which political party is in power, then that simply says density drives two things rather than one.

Out of the Delta frying pan and into an Omicron fire, COVID has again disrupted NSW’s recovery. Hospitalisations are key to outlook, and cautious consumers may slow recovery.

Yet New South Wales has a successful track record versus previous waves, and it is very well vaccinated. We expect the state to be resilient to Omicron’s challenges.

Victorians are the best in the nation at juggling COVID challenges.

They’ve had to be. And that experience is a big asset for 2022. Add high vaccination rates, as well as the impressive rebound from Delta lockdowns ahead of the latest surge in caseloads, and that says the state is well positioned to handle the challenges of Omicron.

Queensland did remarkably well, keeping COVID out, thereby protecting its economy.

But its borders are now open and cases are soaring, so the state will have to navigate new challenges in its economic recovery. That’s entirely doable, yet it may be a bumpy ride for a state that remains rather less well vaccinated than the nation.

South Australia’s excellent run through COVID continues, despite the virus’ surge since borders reopened. Tourism operators are delighted but families are wary as cases climb.

Either way, South Australia’s recovery has entered a new phase as it seeks to bake in some of its COVID windfall from the last two years.

West Australia’s recovery largely went uninterrupted in 2021, supported by red-hot iron ore prices and shielded from the pain of prolonged lockdowns.

But the state’s resilience is set to be tested, with iron ore prices cooler and vaccination rates rising, clearing the way for the state to rejoin the rest of Australia (and the world) this year.

No longer COVID-free but now open for business. Tasmania has been Australia’s standout economic success story during COVID to date. Tassie’s transition to living with the virus will be challenging, but it is well underway, and the state’s recovery is still chugging along nicely.

Tight borders have helped the Northern Territory keep COVID at bay for much of the pandemic. But cases are now rising. Given that the Top End has relatively low vaccination rates and a relatively vulnerable population, it faces a trickier transition.

The ACT is out of lockdown and very much back in business. Although caseloads are up, extraordinarily high vaccination rates are a massive shield, and a raft of new government initiatives will support the territory’s medium term outlook.

But this is an election year. As usual, that means a temporary slowdown is coming.