A smooth international roll-out of vaccines this year would boost the Australian economy by $17bn and generate nearly 40,000 jobs, new analysis by KPMG Economics finds.
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.
Scenarios modelled in KPMG’s latest Quarterly Economic Outlook show there could be a 2.8 percent boost to world GDP in an ‘upside’ case, where the global vaccination program is accelerated – both in terms of coverage and speed – enabling all countries to fully open their international borders to travellers from the beginning of 2022.
But the downside scenario, involving a failure to deliver a comprehensive and timely vaccine program to low- and lower-middle-income countries – which prevents a widespread opening of the global economy before 2022 – would result in a hit to world GDP of 1.2 percent. In this scenario, current restrictions on international travel and on mobility in countries with limited access to a vaccine remain until the end of 2021, rather than easing over the course of the year.
Dr Brendan Rynne, KPMG Australia Chief Economist, said: “From an Australian perspective, our modelling shows the relative importance of service exports to the economy, especially the benefit associated with foreign students and inbound tourism. A global delay in the rollout of vaccinations and the subsequent opening up of international borders would have a disproportionately larger negative effect on Australia. A continuation of the drop in migration we are now experiencing would have serious implications for our projected population figures and GDP by the end of the decade.”
“It should be noted that the Australian government has done the right thing in terms of facilitating a strong and equitable international roll-out by joining the COVAX initiative and by giving full support to Papau New Guinea.”
“From a global perspective, the figures show how economic recovery is dependent on a smooth and uniform vaccine rollout. In our central case we are projecting global GDP to rise by 4.4 percent this year, so another 2.8 percent hike on top of that would be a huge step – when you consider the output loss in the whole of the GFC was only 2 percent. But a 1.2 percent hit would be a serious blow.”
“The profile of the upside scenario GDP suggests the faster rollout of the vaccine generates a ‘sugar-hit’ for most economies, with consumption activity temporarily boosted by pent up demand. In some cases, this temporary boost includes consumption expenditure brought forward from future periods.”
KPMG’s two scenarios allow for a faster and slower rollout of the global vaccination program than that captured in our central forecasts. In the baseline forecasts the vaccine roll-out is expected to allow a gradual reopening over the course of the year, with international travel initially returning in the second quarter of 2021 and recovering pre-Covid levels by the end of the year.
In the upside scenario, GDP growth would be higher in all major countries and regions, with the biggest positive impacts in those countries where services account for a relatively high share of trade (such as the UK, Denmark, Greece, India and Singapore) and in countries where the level of restrictions to protect public health remain high in the central case (such as Germany, the Netherlands and Austria).
In the downside scenario about 25 percent of international travel remains restricted until the end of 2021, which results in global services trade remaining depressed and world trade growth declining by 1.2 percent relative to the baseline. GDP growth would be weaker in all countries, especially those that have not secured access to sufficient doses of vaccine. This includes large parts of Africa and Latin America.
The KPMG report also contains new forecasts for the Australian and world economies, outside of the scenario modelling.
Brendan Rynne said: “In terms of outlook, we expect to see strong performance in the Australian economy, with GDP boosted by the unlocking of pent-up demand from a lockdown-affected 2020 – 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.”