Faster global rollout of COVID -19 vaccine a $17bn boost to Australia
In our latest Quarterly Economic Outlook, KPMG forecasts a global rise of 4.4 percent in GDP this year. But there is a big caveat. So much is dependent on the speed and success of international vaccine distribution.
So much so, that we modelled two scenarios for the global roll-out of vaccines – firstly, an efficient, equitable distribution, which will lead to all countries opening their borders to international travellers by the start of 2022. In this ‘upside’ scenario we assess a 2.8 percent boost to the world economy, compared to our base forecast.
But in a downside scenario, failure to deliver a comprehensive and timely program for low and lower-middle income countries will see thwarted mobility and global services trade being hit. In this downside scenario we assess a 1.2 percent drop in the world economy. GDP would be weaker in all countries – especially, but only, those who have been unable to secure sufficient doses of the vaccine.
This would have a meaningful impact on the Australian economy. The smooth international roll-out of vaccines this year envisaged in the upside scenario would boost the Australian economy by $17bn and generate nearly 40,000 jobs. On the downside, continued international travel restrictions until the end of 2021, resulting in global services trade remaining depressed, would result in lower Australian GDP of $4bn and 13,100 fewer jobs. Our economy is particularly vulnerable to a drop in service exports.
These scenarios come just after a year since the COVID virus turned the world upside down. From an economic perspective thankfully prospects of recovery from the low point of mid-2020 – when world GDP had declined by 7 percent (compared to 2 percent in the GFC in 2009) – looks brighter each day as vaccines get rolled out and new vaccines come on-line. But a return to full capacity will take some time. All economies are poorer than they would have otherwise been if not for the pandemic.
The global economic recovery is likely to be uneven, driven by vaccine distribution but with lockdowns still affecting much of the Northern hemisphere. The covid recovery will be consistent with the history of how the world economy has recovered from previous global events – where the maturity and robustness of industrial and institutional structures and policy responses are critically important.
The recovery is also going to be driven by how monetary and fiscal policy has been utilised by individual countries. Only some countries have cut interest rates to their lowest levels (or beyond) and/or employed Quantitative Easing, while some have used government spending more sparingly than others. For example, some policy support has involved guaranteeing loans to businesses to maintain their viability; therefore the fiscal cost of responding to the coronavirus crisis will rise for those jurisdictions adopting this policy only if the supported businesses eventually fail.
Importantly, there is an understanding that the monetary and fiscal policy response associated with combating the economic fallout of the pandemic is not free. We have seen a rapid increase in deficits and government debt; so far the increase has been about 15 percentage points on pre-pandemic levels for advanced economies and around 10 percentage points for emerging economies. Such an increase would usually raise concerns for global institutions like the IMF and World Bank, but given the unique circumstances they have tacitly endorsed the conclusion that “doing nothing” is not an acceptable option.
Globally, while the final quarter of 2020 saw a return to lockdowns in the northern hemisphere, industrial activity appeared to be returning to pre-pandemic levels. However, the personal services, travel, accommodation, food, and entertainment sectors, remains severely impacted by the government policy interventions aimed at limiting the spread of the coronavirus. Job losses have also tended to be concentrated in these sectors, and, given these sectors tend to employ low-wage workers, the coronavirus pandemic has exacerbated income and wealth distribution problems in society.
The economic performance of individual countries during 2020 was heavily influenced by consumption spending. Household spending over the past year has necessarily focused on the purchase of goods (as opposed to services), which has meant those countries producing manufactured output have (generally) seen a sharper recovery than countries that have an industrial structure biased towards services.
Australia has weathered the global coronavirus pandemic better than most other countries. A mix of good management and good luck has meant that the spread of COVID-19 within the Australian population has been limited, and as a consequence of that (and also due to the high quality health system that exists in Australia) the fatality rate associated with the disease has been very low.
Australia is ranked No.2 in the world behind New Zealand in Bloomberg’s COVID Resilience Ranking, reflecting not only the strong health response that has been undertaken to date but also due to the fact we have secured enough doses of the AstraZeneca / Oxford University vaccine to inoculate the whole population.
So what of the near future? In terms of outlook this year will see a strong performance in the Australian economy, with GDP boosted by the pent-up demand from a lockdown-affected 2020 being met, but this will start to taper off in 2022. Our forecasts on inflation (rising) and unemployment (falling) mean that by next year the RBA will come under pressure to review its pledge to keep ultra-low interest rates until 2024. The inflation genie is still in the bottle, but can definitely be seen edging up the sides.
Real wage growth will continue to be minimal and reflects Australia’s need to implement measures to boost productivity, coming out of the covid era. KPMG analysis has shown a clear link historically between increased capital/technology investment and higher wages. Capex is still a worry, despite recent improved figures.