As the COVID-19 pandemic passes the one-year mark in Australia, the domestic economy has displayed surprising strength. GDP increased by 3.1% in the December quarter, as COVID-19 restrictions have continued to ease. This growth followed 3.4% growth in the September quarter, and brings the annual change through December to -1.1%. The unemployment rate fell to 5.8% in February 2021, as almost 89,000 people joined the labour force. This pushed the number of Australians with jobs above 13 million for the first time in 11 months. As the labour market has recovered and the housing market has continued to accelerate, the Australian economy has been strongly recovering from the pandemic. The rollout of the COVID-19 vaccine in 2021 is expected to enable the government to remove the last COVID-19 restrictions, which primarily relate to international travel.
Labour market strengthens, but problems lurk
In seasonally adjusted terms, fulltime employment increased by 5,500 people over the year through February 2021. The employment-to-population ratio currently sits at 62.3% and has fallen by 0.3% relative to the same period in 2020. The headline unemployment rate sat at 5.1% in February 2020, and fell to 5.8% in February 2021 after peaking at 7.5% in July 2020. While unemployment has improved as COVID-19 restrictions have eased, many Australians are unable to work as much as they would like. The underemployment rate, which measures those that are not fully employed, such as part-time workers who indicate that they would prefer to work more hours, currently sits at 8.5%, up from 8.1% in January. Underemployment in Australia has increased from 6.6% one year ago, reflecting continued slack in the labour market.
The retail, mining, and utilities sectors have posted the strongest recovery in employment over the past year. In contrast, employment across accommodation and hospitality industries has remained weak amid ongoing international travel restrictions, which continue to curtail tourism activity.
Consumption trends
Household final consumption expenditure fell by 2.7% over the year through December 2020, primarily due to weaker demand for hospitality and accommodation. Household spending increased by 4.3% in the December quarter, with purchases of vehicles rising by 31.8%, reflecting improved consumer sentiment, and expenditure shifting towards large purchases and away from restricted travel activities. Victoria recorded the strongest increase in spending, but overall spending in the state remains 7.2% below benchmarks prior to the COVID-19 pandemic. In 2020-21, household consumption expenditure is expected to increase by 1.4%, spurred by a strong recovery in the final half of the year. However, short lockdowns and negligible immigration are expected to hinder spending.
Larger-than-usual government stimulus and income support, primarily through the JobKeeper wage subsidy, have strongly supported spending. This subsidy ended at the end of March 2021, leaving the economy to support itself in the months ahead. Household consumption expenditure is expected to rise by 4.0% in 2021-22. Companies in the services sectors, such as food services, arts and recreation, are anticipated to drive economic growth during the year.
Inflation
The consumer price index (CPI), which measures inflation, increased by 1.4% in 2019-20, and is expected to rise by 1.5% in 2020-21. This result represents an underperformance relative to the target range of 2% to 3%. The CPI rose by 0.9% over the year through December 2020, with the most significant price rise occurring for tobacco, while electricity represented the most significant price decline.
The Reserve Bank of Australia has kept the cash rate at the effective lower bound of 0.1% and has conducted an extensive quantitative easing program. The cash rate is expected to remain at the lower bound through to 2022-23, before slowly rising as economic growth improves. Loose monetary policy has reignited fears of runaway inflation in Australia. However, ongoing deflationary pressure is expected to constrain inflation, leading to an average annualised inflation rate of 1.8% over the five years through 2025-26. Monetary policy is expected to come under greater scrutiny in 2021-22, particularly as an ongoing expansionary policy continues to spur the residential property price index to record highs.
Outlook
While the Australian economy grew during the fourth quarter of 2020, the economy will likely operate below pre-pandemic levels of output until the country reaches herd immunity. The COVID-19 vaccine rollout will assist the economy’s recovery, although recent delays in the vaccine rollout may hinder economic growth. Australia’s access to vaccine supplies remains limited, due to delays in developing a domestic vaccine manufacturing supply chain.
