Deloitte Access Economics Business Outlook: We got this

We assume that:

  1. Australia succeeds in keeping virus numbers mostly suppressed, state borders remain mostly open, and that domestic restrictions gradually ease as vaccines roll out
  2. Vaccines begin to be available from February, and achieve the equivalent of herd immunity by late 2021
  3. International borders re-open gradually, starting with New Zealand in coming months, broadening to cover much of the world by end-2021 (though it may not be until 2024 that global and Australian people movements are fully back at 2019 levels).

Much of the world has fumbled its virus response, but early and effective vaccines are a gamechanger. That still leaves tough months ahead in Europe and the US as rampant cases drive consumer and business caution, but the big picture is one of strengthening global recovery, with the Asia Pacific leading the way.

Yet the scars from this pandemic will linger, with unemployment set to stay high for some time in most of the globe. Not surprisingly, the world’s politicians are therefore keen to turn attention towards “foreigners” and away from their domestic challenges. The resultant populism – and downright bullying – is unlikely to derail global recovery, but tricky vaccine rollout logistics and fraught geopolitics will both keep the outlook a volatile one.

Australia is one of just five nations – Taiwan, China, Vietnam, New Zealand and ourselves – who enter 2021 very well-placed. COVID numbers are very low, the vaccine news is excellent, confidence is rebounding, Victoria is catching up to the recovery already underway elsewhere, there are heartening developments in job markets, and China’s trade war with Australia has – so far at least – actually added to national income rather than hurt it.

To be clear, although the damage of 2020 is winding back fast, it definitely hasn’t disappeared, and it will linger: the enormous protection provided by the federal government is being dismantled rapidly, the world economy is a mess, and the geopolitical backdrop for Australia looks more troubled than it has been for many years. Then again, a bit of perspective is handy. Australia has made many mistakes in juggling COVID, but so far, we’ve made fewer mistakes than most of the globe. You’d rather be here than almost anywhere else.

Wage and price gains have been on a downtrend for decades, both locally and globally, and the COVID crisis will keep both bumping along the bottom for some time. Inflation may not hit rock bottom until mid-2022, and may not start to climb much until unemployment drops well under 6% – which we don’t see happening until 2023. And, even allowing for the improved recovery prospects accompanying the good news on vaccines, underlying inflation may not get back into the RBA’s comfort zone (of between 2 and 3%) until late 2023 or early 2024.

COVID has crushed interest rates, and even though vaccines mean global recovery looks more assured, elevated unemployment will keep inflation and interest rates on a tight leash, as will central bank caution and the increased power of interest rates in a heavily indebted world. Meantime Australia’s relative outperformance on COVID and the high flying iron ore price have the $A celebrating. But both those factors are temporary, and we see US stimulus as more likely to send the US dollar up than it is to boost the Australian dollar.

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