Poor vaccination supply is upending the economic recovery
Australia’s dismal vaccination rate is undermining what was a great scorecard for the economy that emerged over the first half of 2021.
First the good news.
Since the start of 2021, the economic news was stunningly good. Not only relative to the forecasts and expectations of all economists, but in absolute terms with the unemployment rate falling, wages growth picking up, the stock market and house prices hitting record highs and business conditions and consumer sentiment tracking at or near record highs.
Now the sobering news.
It has been obvious for many months that the Morrison government’s dithering, missteps and errors in obtaining enough COVID-19 vaccinations, was a huge risk to the health of Australians and was a major risk to the economic outlook.
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Indeed, back in February 2021, governor of the Reserve Bank of Australia, Phillip Lowe, said quite plainly when looking at the rapidly improving economic outlook, that “the downside scenario is one in which there is a combination of further sporadic domestic outbreaks [and] a delay in the rollout of vaccines”.
Up until the last few weeks, the economic news was fabulous.
So much so that the tightening in the labour market was at the cusp of sparking a surge in wages growth which would have helped to underpin a pick-up in inflation.
With monetary policy remaining at super emergency setting, with the official cash rate at 0.1 per cent and additional aggressive buying of government bonds, there was no doubt the economy was on track to grow by close to 5 per cent during 2021 and the unemployment rate was set to fall well below 5 per cent.
Arrogance comes back to bite
NSW Premier Gladys Berejiklian was too smug by half when she was critical of other states, most notably Victoria, as they tackled outbreaks of COVID-19 with harsh lock downs and less than perfect contact tracing systems.
Berejiklian noted, variously, that Victoria took the 'easy' option by locking down for the fourth time rather than allowing residents to continue living their lives. It was also portrayed by some that NSW had the ‘gold standard’ contact tracing system for those infected with the virus and it was a system other states should follow.
Fast forward to now and the case numbers of NSW are surging. The ‘gold standard’ contact tracing system is not keeping up with the liaisons of the many hundreds of infectious people who were allowed to go about normal activities and spread the COVID-19 virus around NSW.
It is now clear that the lockdown in NSW is slowly evolving and will be more severe and last a lot longer than appeared the case and intention of Berejiklian just two weeks ago.
The Federal government must also take a huge slice of responsibility for this fiasco.
The vaccination roll out in Australia is one of the slowest in the industrialised world. Poor procurement of vaccinations means that millions of people who want vaccinations can’t get them. This is because the Australian government did not put in place contracts to buy them in sufficient volumes.
This low vaccination rate is one of the reasons for the spread of the virus in NSW now and this is smashing business activity.
What happens next?
The extent of the economic dislocation from the current lockdowns is still to be determined. How deep the economy slides will be determined by how long the lockdown lasts and the support the Federal and States governments give to those most impacted.
Suffice to say, the hit to the economy will see people lose their jobs, working fewer – even zero – hours as their work places close due to the lockdowns. The September quarter GDP data and employment will be severely impacted.
What were realistic expectations of a further sharp fall in the unemployment rate before year end has been dashed.
Business investment plans, which looked particularly strong, will also be adversely impacted.
And if the cash support measures from the Federal and State governments err on the side of too little and are only short term, the economy will be even weaker.
When the COVID-19 war is over
That said, the lockdowns will eventually end. The issue for then will be what sort of damage has been done to the economy before it gets on to the recovery path again.
Suffice to say, the labour market should be able to resume the path to lower unemployment. Instead of hitting a 4.5 per cent unemployment rate by the end of 2021, this has been postponed to the middle of 2022. In human terms, this is six months of unemployment for tens of thousands of people.
This will dampen the burgeoning wages pressures evident until recently, so much so that 3 per cent annual wages growth is now unlikely to be seen in the next 6 months.
Business investment plans are likely to be scaled back, at least for now, which will erode support for the bottom line economic growth rate. It will also work against the much needed lift in productivity.
The Australian economy remains resilient, aided, thankfully, by hot demand for many of our products from the fabulous Chinese economy. Without this boost to exports, economic conditions would be much more problematic.
The current NSW COVID-19 lockdown and its spreading tentacles of economic pain will hurt economic conditions for the next few months.
Most importantly, until the whole population is vaccinated, Australia’s economy will remain at risk of further COVID-19 outbreaks and massively disruptive lockdowns.
It remains a serious fault of the Morrison government why there is a scarcity of vaccinations and it is troubling that it may be many months the population is vaccinated.
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