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5 roadblocks to Australia's 2021 COVID recovery

Jessica Yun
·5-min read
Visitors talk before the Harbour Bridge on the Circular Quay in Sydney on October 26, 2020. - Australia has been relatively successful in containing the spread of the coronavirus, with about 27,500 cases and 905 deaths in a population of 25 million. (Photo by Saeed KHAN / AFP) (Photo by SAEED KHAN/AFP via Getty Images)
Australia's economic recovery hinges on these issues. (Photo by SAEED KHAN/AFP via Getty Images)

After Australia plunged into its first recession in nearly three decades, economists are anticipating a strong rebound this year.

But 2021 inherits many of the risks and obstacles presented by 2020, such as the Australia-China trade dispute, high levels of unemployment, and the winding back of government support.

Meanwhile, global forces are at play, with America’s destiny set to change course once President-Elect Joe Biden’s takes the Oval Office.

According to some of the nation’s best economists, here’s what we have to look out for this year.

COVID-19 itself, and the vaccine’s roll-out

The biggest threat to Australia’s economic recovery remains the pandemic and how well government and health authorities can keep it contained while we wait for the vaccine rollout, now slated for early March.

“The top priority must be stopping the virus: that is by far the best thing that can be done for the economy,” Australia Institute’s Centre for Future Work chief economist Jim Stanford.

Compared to other developed nations, Australia has not just ‘contained’ the virus, but has come close to eliminating it.

“However, premature relaxation of restrictions, confusing health orders, and a continuing tendency by some political leaders to falsely counterpose protecting the economy versus protecting public health, means Australia is not out of the woods,” Stanford warned.

And when it comes to vaccine rollout, Australia is weeks behind other countries. The logistics of its distribution will present a new challenge.

“If it works, and if it is delivered quickly to most Australians, the vaccine will be a game-changer: work, production, and spending can then all start to get back to some kind of normal.

“But those are two big ifs.”

The recovery of industries such as international travel are hinging on the vaccine, with Qantas yesterday announcing it would resume international flights from July.

Australia-China tensions are still strained

Bilateral ties between the two nations kept reaching new lows over the course of last year, with China attacking Australian exports after leading the call for an independent inquiry into the origins of COVID-19.

But there’s some good news; tensions could simmer down as the Asian superpower ramps up its industrial production.

“The key is iron ore. Two-thirds of China’s iron ore comes from Australia and we are a reliable, efficient supplier, UNSW economics professor and ‘Airport Economist’ Tim Harcourt told Yahoo Finance.

“And even in areas like coal … China is a long way from supplying its needs domestically, so Australia is the best economic bet for China’s prosperity.”

China can fulfil some of its wheat and timber needs domestically, but demand far outstrips supply, so imports from Australia will have to fill the gap, he added.

“In short, Australia needs China, but China needs Australia so watch for a softening of rhetoric and a strengthening of commodity prices.”

But JP Morgan Asset Management global market strategist Kerry Craig believes any more tariffs or trade blows on key exports would hit hard.

“In this match-up of David and Goliath, Goliath would most likely win.”

Population growth, or lack thereof

When the gravity of the pandemic sunk in, Prime Minister Scott Morrison had Australia shut its borders to the world.

This has meant that population growth – one of the biggest factors in pushing up house prices, and by extension the broader economy – has been stymied.

That’s why it’s crucial that immigration inflows and foreign students start flocking back to Aussie shores, said independent economist Stephen Koukoulas.

“If this is absent or largely absent in 2021, the recent uptick in housing, for example, will be short lived. Demand will simply be too low to spark a sustained rise in the housing market,” he said.

If this happens, other issues, like overall consumer spending and wealth, will be impacted, and wages growth will remain weak.

“A resumption in immigration in the second half of 2021 (which seems optimistic) would be good news for the economy.”

Government withdraws support – and big business has to step in

The Morrison Government kicked off 2021 by slashing both JobSeeker and JobKeeper rates. As the government hits the brakes on fiscal support, corporate activity will have to increase to pick up the slack.

“Signs that capital spending or hiring is moving too slowly will weigh on the outlook. This would have knock on effects to the consumer outlook,” said Craig.

Meanwhile, household debt levels remain high – and with the shadow of 2020 weighing heavily, consumers may not choose to spend, and instead opt to pay down debt and improve household budgets.

The key thing to watch out for here is jobs growth, added AMP Capital chief economist Shane Oliver.

“So far it has recovered nicely and this needs to continue to see the recovery become self sustaining as Government support like JobKeeper winds down.”

Biden expected to be positive for global growth

US President-Elect Joe Biden will take over the Oval Office later this month, and economists are expecting he will reshape America’s presence on the global stage.

“Investors hope that US President-elect Biden announces a stimulus package of at least US$1 trillion, which could boost US economic growth, returning the economy to pre-pandemic levels by the end of 2021,” said CommSec chief economist Craig James.

“As President, Joe Biden could introduce tougher financial regulation and impose anti-trust measures on big technology companies.”

Donald Trump rattled global markets with his aggressive approach to China, and the global economy slowed down as a result of the uncertainty.

“Most observers believe that Biden will adopt a tough but conciliatory stance with China rather than a ‘tit-for-tat’ tariff battle,” James added.

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