As 2022 gets underway, the dramatic surge of the Omicron variant has added to supply chain pressures and labour shortages, a combination that continues to play havoc with many sectors of Australia's economy, further restricting business output.
Senior Industry Analysts at IBISWorld have prepared a Special Report investigating the impact that these factors have had on some of the most affected industries across the country.
Contents:
6. Accommodation and Food Services
1. Introduction
Australia’s Omicron wave of the COVID-19 pandemic is expected to have a notable negative effect on the nation’s headline economic figures. Supply chain pressures and labour shortages have been restricting business output. Prior to the Omicron outbreak, many sectors were already facing significant labour shortages. According to the ABS, job vacancies increased by 18.5% in the three months through November 2021, with over one fifth of businesses reporting job vacancies. Comparatively, the number of businesses reporting job vacancies prior to the pandemic in February 2020 was 11%, representing a 74.2% increase since the pandemic began. The Omicron outbreak is forecast to exacerbate existing labour shortages as people with the virus and close contacts are forced to isolate, significantly restricting staff availability and business output.
In addition, declines in consumer sentiment and business confidence are anticipated to cause demand growth to weaken across most sectors of the economy. This is primarily due to the combination of continued uncertainty around the pandemic restricting consumer spending, and individuals with the virus and close contacts isolating at home. Consumer sentiment and business confidence have typically fallen during other substantial outbreaks of COVID-19. For example, the initial outbreak at the start of 2020 caused consumer sentiment to plummet to 75.6 index points in April 2020, while business confidence also dropped to -15 index points for the June 2020 quarter.
Since the initial outbreak, consumer sentiment and business confidence have become more resilient to spikes in COVID-19 cases. While consumer sentiment and business confidence both fell during the substantial outbreaks in New South Wales and Victoria in 2021, consumer sentiment never dropped to negative territory and business confidence dipped to -1 index points for the September 2021 quarter. This resilience was largely due to the wider availability of vaccines compared with 2020, which offset much of the uncertainty around the pandemic easing. Nevertheless, the current wave of Omicron cases is expected to cause both consumer sentiment and business confidence to fall into negative territory. Consumers’ outlook on their financial positions and the economy is expected to worsen in the current year, while business profit and trading conditions are anticipated to deteriorate due to supply chain disruptions, labour shortages and demand declines.
Due to demand constraints and supply challenges brought on by the Omicron wave, IBISWorld forecasts March quarter GDP to grow by 0.6%, down from the pre-Omicron forecast of 1.6% growth. This downgrade has cut 0.5% from IBISWorld’s 2021-22 GDP forecast, to growth of 2.7%. In this release, IBISWorld analysts have examined how the Omicron variant is likely to affect the sectors and industries that are most exposed to the variant.
2. Construction
The rapid spread of the COVID-19 Omicron variant has affected the Construction division’s supply chains and access to labour. Many construction workers have been unable to work due to rising infection rates, reducing activity on a number of worksites. The fallout from the pandemic is expected to reduce the sector’s employment figures by 3.6% in the current year. Further staff shortages in the sector’s supply chains have caused major delays in the delivery of key building materials, such as wood, concrete, brick, and glass. The Omicron outbreak and its associated effects are likely to cause significant delays in many construction projects. The ramifications of these delays have the potential to constrain division operations for the rest of the financial year. As a result, industry revenue is expected to contract by 5.7% in 2021-22.
Confirmed COVID-19 cases have increased substantially following the December 2021 holiday period, and many firms have reported labour shortages as their workers have been required to isolate. Workers that are infected and those that are considered close contacts have been required to undergo prolonged periods of isolation. Some construction firms have reported as much as 25% of their labour force being unable to attend work. These shortages have been concentrated in Australia’s two most populous states, Victoria and New South Wales, where over 60% of the industry’s establishments are located. Difficulties in procuring Rapid Antigen Tests (RATs) and Polymerase Chain Reaction (PCR) tests to establish whether workers can leave isolation early has further exacerbated labour shortages.
Vaccine mandates across a number of Australian states have further constrained the sector’s access to labour. For example, in Victoria, worksite organisers are required to check the vaccination status of workers that attend sites. In addition, construction workers required for building and maintenance of essential infrastructure are required to show evidence of a third booster vaccine dose to continue work in select states. Workers that are averse to receiving vaccinations have been unable to attend work, adding to the sector’s staff shortage issue.
The largest shortages of construction workers are among carpenters, painters, and plumbers. Worksites are increasingly being hampered by the lack of skilled labour needed to perform project critical work at specific stages of construction. Building companies have resorted to poaching subcontractors from one another to continue their own operations by offering lucrative short term rates.
In response to these constraints, Australia’s top health panel, Australian Health Protection Principal Committee (AHPPC), has submitted a recommendation to the National Cabinet. The recommendation includes classifying building and construction as an essential service for isolation exemption purposes under certain circumstances. Urgent repairs or maintenance, completion of building or construction in progress, and building and construction work to enable or support essential functions would be included as reasons for employees to return to work, provided they are not displaying any symptoms. Workers may also be potentially eligible for Pandemic Leave Disaster Payments which provide lump sum payments for people that can’t earn an income due to isolation directions. These lump sum payments are not to the same scope as the Federal Government’s JobKeeper, but may alleviate wage cost pressures for some firms.
Further disruptions along the Construction sector’s supply chains have led to the postponements of many construction projects. Upstream labour shortages and factory closures among firms that manufacture building materials have caused shortages in inputs such as plasterboard, cement, prefabricated wooden structural components, and construction metal forging and casting. In response to diminished supply, many retailers and wholesalers have increased their prices, with a number of downstream firms characterising this as price gouging.
3. Supermarkets
Supermarkets and grocery stores have been among the most acutely affected businesses amid Australia’s surging COVID-19 case numbers. Operators have reported stock shortages across several staple product lines, including meat, fresh produce, toilet paper and painkillers. Labour shortages along the food supply chain, isolating supermarket employees and surging demand have combined to cause the most notable grocery supply shortfalls since the early stages of the COVID-19 pandemic.
Compulsory isolation for confirmed COVID-19 cases and close contacts has caused staff shortages in businesses along Australia’s food supply chain. For example, insufficient staff numbers at poultry processors have caused a severe decline in cut chicken production, which has been reflected in retail and wholesale industries. Many of Australia’s major meat processing facilities are operating with up to a 50% reduction in typical employee numbers. Up to 40% of workers along the dairy product supply chain have spent time off work due to isolation requirements. Processing constraints, coupled with transport sector staffing issues, are leaving some produce spoiling on farms. Furthermore, already limited inputs to supermarket warehouses have not consistently made it onto store shelves. Over 10% of the industry’s 379,433 employees are reported to be unable to work, with shortfalls being more acute in distribution centres than in stores. However, independent grocers, including IGA stores, tend to have more diversified supply chains than major players Woolworths, Coles and ALDI, reducing instances of stock shortages. Industry market share is expected to slightly shift toward smaller operators during the current Omicron wave.
Despite stock shortages, grocery price growth has not been widespread. Although rising transport costs have, at times, been passed onto consumers, strong industry competition limits supermarkets’ scope to raise prices. Undersupply to supermarkets is expected to remain the most notable impact on consumers. However, fresh produce prices had been falling prior to the Omicron wave, due to favourable farming conditions. Further price falls are unlikely amid challenging conditions for supermarkets.
Restrictions on stock and labour inputs are projected to limit revenue growth in the Supermarkets and Grocery Stores industry in 2021-22. These conditions are likely to continue until at least late February. This bodes poorly for industry operators, as revenue growth had already slowed to 0.7% on a rolling 12-month basis in November 2021, according to the ABS. However, this low growth rate is partially due to elevated sales during lockdowns over the previous 12-month period. In addition, the current COVID-19 wave is causing lockdown-like economic conditions across Australia. Many individuals are avoiding locations such as bars, hotels, arts venues and sporting arenas to reduce exposure risks. While supermarket demand surged under previous lockdowns, stock shortages are unlikely to have peaked given the current trajectory of COVID-19 case numbers. An extended period of stock shortages would mean supermarkets are unable to capitalise on strong underlying demand, putting further pressure on already modest profit projections for 2021-22.
4. Transport
The Transport sector has faced supply chain disruptions in various forms since the onset of the pandemic. Most significantly, sporadic port closures and surges in consumer demand for goods have contributed to global sea freight bottle necks, particularly in the movement of goods between Asia and North America. However, these bottle necks have increased sea freight costs by as much as ten times pre-pandemic levels and caused significant delays in the international movement of goods. These factors have had mixed effects on operators in the Transport sector. On one hand, transport operators are able to charge higher prices due to surging demand and limited capacity, particularly for sea freight transport. However, customer satisfaction has deteriorated as businesses and end consumers have endured longer wait times for certain goods.
The current outbreak of the Omicron variant in Australia has presented new issues for the sector. The surge in infections has created staff shortages, which have been further exacerbated by close contact isolation requirements. The severity of these shortages varies across the sector. For example, firms have indicated anywhere from 10% to 50% of truck drivers are not available for work due to returning a positive test or isolation requirements. The Transport Workers' Union has reported that a third to half of Australia's truck drivers were not working during the second week of January. Many road freight transport operators had already reported boosting wages to attract more staff, which will likely continue as these shortages persist during the Omicron wave.
Staff shortages are contributing to an increase in congestion at container terminals. In particular, ports in Melbourne and Sydney are experiencing the most significant delays. These delays are anticipated to eventually lead consumers to put off certain purchases, slightly reducing the volume of goods requiring transport and, as a result, limiting revenue in the short term. However, higher prices could offset this pressure on revenue. While sea freight container prices have recorded the most significant increase, congestion at ports and limitations on road freight space could also lead to greater competition and rising prices. Depending on the duration of these conditions, road freight and broader logistics firms could benefit from higher prices across more modes of transport. However, the Federal Government has relaxed isolation and testing requirements for staff in critical sectors, including transport, which is likely to provide some relief from staff shortages and the associated freight congestion. Despite all of these disruptions and difficulties, transport operators are expected to record higher profits as larger downstream customers that rely on timely distribution vie for container space through intense price competition.
5. Healthcare
Labour shortages have significantly affected the healthcare sector throughout the pandemic. Workers in the healthcare sector include frontline workers such as nurses, doctors, pharmacists, paramedics, testing site workers and a range of crucial support staff. Many of these workers are tested weekly through Polymerase Chain Reaction (PCR) tests, if not daily through Rapid Antigen Tests (RAT), to protect the safety of staff and patients. However, this has contributed to a higher number of workers in isolation. Some subdivision operators have reported that the Omicron variant has placed staff under more pressure than in any other waves of COVID-19 due to a surge in infections and hospitalisations.
Government agencies and industry operators have implemented several strategies to limit the effects of staff shortages. For example, broader vaccine mandates and reduced isolation periods have been implemented to prevent large labour shortages. However, the combined effects of a surge in demand and limited available staff have negatively affected the industry.
Vaccine mandates are in effect across the country for frontline and other healthcare workers for the first two doses. This factor has minimised the impact of COVID-19 and the outbreak of the Omicron variant on staff shortages. However, massive growth in the number of COVID-19 cases in the community has contributed to higher rates of hospitalisations and increased the number of healthcare workers being defined as close contacts and forced to isolate. In mid-January 2022, over 4,000 health staff in Victoria were unavailable to work due to either having COVID-19 themselves or isolating due to being deemed a close contact, placing significant pressure on the subdivision.
New South Wales and Victoria have been the most heavily affected by the Omicron outbreak and have since mandated booster shots for essential healthcare workers. Some other states, such as Western Australia, have also adopted this mandate. Other states, such as Queensland, have kept booster shots as a recommendation. Both NSW and Victoria have also provided exemptions from isolation for some healthcare workers when deemed close contacts. In New South Wales, frontline workers are exempt from isolation when they are asymptomatic. In Victoria, workers must complete a RAT daily and return a negative test before working. This measure is in addition to many workplaces across the country requiring health workers to complete weekly PCR tests, which has been in place for the majority of the pandemic.
Significant labour shortages and the highest number of hospitalisations during the pandemic have contributed to industry firms running over capacity. To alleviate staffing pressures, New South Wales, Victoria, Queensland and South Australia have all suspended elective and non-emergency surgeries. Some hospitals across New South Wales and Victoria have also considered closing their emergency departments to deal with the high number of hospitalisations from COVID-19. From 19 January 2022, the Victorian Government enacted a Code Brown for the health services sector to combat rising COVID-19 hospitalisations. The implementation of the code postpones the leave of thousands of healthcare workers, defers non-essential services, and streamlines ambulance offloading. The code was last enacted in 2017.
Ambulance services have also been under significant pressure due to rising demand and staff shortages among paramedics. In early January 2022, over 400 ambulance staff were either isolating due to contracting COVID-19 or were close contacts. Surf lifesavers, students and volunteers have been filling some slots to ease pressures. NSW Ambulance have reported having an average of 4,500 calls per day over a seven day period due to the Omicron outbreak. Prior to the outbreak in December, the seven-day average had not exceeded 4,000 calls. Residents in New South Wales and Victoria have been urged to use to virtual clinical care or hotline care services and reserve ambulance services for emergency situations. However, these services have also reported overcapacity and hired additional staff in response to high demand. Moreover, the majority of COVID-19 cases that have required hospitalisation are reported to be the Delta strain and not Omicron.
Labour shortages in the healthcare sector are likely to persist until the end of the current wave of Omicron cases. NSW Health has stated that hospitalisations are projected to peak in the week beginning 24 January 2022, with hospitalisations expected to return to pre-Omicron numbers in early March 2022. The Victorian Department of Health also anticipates that hospitalisations related to COVID-19 will near a peak around the same time period, and will likely follow a similar downwards trend. A slowdown in the rate of infections is likely to ease pressure across the healthcare sector, particularly for pathology and ambulance services.
6. Accommodation and Food Services
The outbreak of the Omicron variant is currently placing additional downward pressure on the Accommodation and Food Services sector, on top of a critical staff shortage due to declines in net migration over the past three years. Rising COVID-19 case numbers and the subsequent staff shortages are fast becoming a common trend across Australian businesses. This factor is leading many accommodation operators to reduce booking capacity, and restaurant and bar services for guests.
Similarly, hospitality firms are struggling to remain open for dine-in services, with large numbers of staff contracting the virus or isolating. Subdivision operators generally hire casual workers to maintain shift flexibility and limit operating costs. However, firms are becoming more hesitant to hire new staff due to uncertainty around worker availability and consumer behaviour.
In particular, a surge in COVID-19 case numbers is deterring people from dining in at venues, due to concerns over community transmission. Consumer sentiment declined by 1.0% in December 2021, to 104.3. This represents a 7.0% decline when compared with a similar period in the prior year. This trend is largely driven by uncertainty surrounding the Omicron outbreak, which discouraged consumer spending. People are more likely to dine out at food service establishments during periods of rising consumer sentiment. The combination of declining consumer sentiment and fears of contracting COVID-19 has encouraged more individuals to opt for homemade meals.
Meanwhile, some restaurants and cafes have returned to offering takeaway food services only or reduced their trading hours, due to a lack of sufficient staff to serve dine-in patrons. Caterers are also facing a reduction in event booking revenue, as many individuals cancel private functions and events amid rising COVID-19 cases. These factors are hindering revenue growth in the Food and Beverage Services subdivision.
Operators in the tourism and hospitality sectors are calling for support from federal and state governments. Operators that are forced to close their operations due to staff contracting COVID-19 or being forced to isolate have minimal financial support available to remain afloat during the closure periods. Some workers can apply for a lump sum payment under the COVID-19 Disaster Payment program, which is designed to assist workers that are adversely affected by the mandatory isolation requirements and are on unpaid leave.
Nevertheless, revenue in the Accommodation and Food Services sector is projected to expand by 11.6% over 2021-22, as easing travel restrictions drive growth in the total number of tourist visitor nights in Australia, and boost demand for accommodation. Meanwhile, employment numbers will likely grow at a significantly slower pace than that of revenue in the current year, due to ongoing staff shortages.
7. Consumer Goods Retailing
The spread of the Omicron COVID-19 variant in Australia since December 2021 has increased the labour shortage in the Consumer Goods Retailing subdivision. Retail giants such as Kmart and Officeworks faced labour shortages, both in store and in warehouses, during the 2021 Christmas period. In the current year, Kmart opened over 70 new stores across Australia and needed approximately 5000 employees to run them. Three weeks prior to the peak Christmas sales period, the retail giant still needed to fill nearly 2500 Christmas casual positions. However, retailers such as Myer and David Jones did not face similar issues while sourcing Christmas casuals, as they began hiring as early as August 2021. Isolation standards have exacerbated existing labour shortfalls in the Consumer Goods Retailing sector. International border closures over the majority of the past three years have reduced the number of international students and travellers available to fill casual roles. This factor has contributed to a labour shortage in the Consumer Goods Retailing sector, as these employees constitute a major share of the workforce.
According to the Australian Retailers Association, an estimated 76% of retailers have staff in quarantine due to COVID-19 in mid-January 2022. Furthermore, around 33% of retailers have reduced trading hours at several stores and nearly 20% have temporarily closed stores due to staff shortages. The labour shortage brought on by Omicron infections has proved more disruptive to the Australian economy than lockdowns implemented during the Delta wave. The Government’s isolation requirements and the scarcity of available testing has forced businesses to limit their operations considerably. Unlike during the Delta wave, these businesses do not have access to COVID-19 support measures, as many of these schemes were available for a limited period of time.
The Consumer Goods Retailing sector has also faced immense supply chain disruptions over the past three years. Several industries, such as Houseware Retailing and Computer and Software Retailing, have benefitted from increased demand during the pandemic. However, temporary store closures, logistical delays and reduced manufacturing activity in key overseas countries have led to supply chain disruptions for consumer goods retailers over the period. For example, imports satisfy up to 50% of flower supply in the Australian Flower Retailing industry. Logistical delays due to reduced supply of internationally sourced flowers over the past three years have pressured local flower growers to increase their supply. Meanwhile, in the Computer and Software Retailing industry, demand for gaming consoles has been extremely high over the past three years. However, stock has been in short supply. In particular, stock shortages have plagued the Xbox Series X and Series S, and the PlayStation 5, since their Australian launches in November 2020. While consumer pre-orders have been fulfilled, global supply and distribution issues have limited availability of these consoles.
Additionally, to avoid supply shortages ahead of the festive season, consumers began shopping as early as October 2021. This trend led to record sales for the retail sector in November 2021. According to the ABS, clothing, footwear and personal accessories sales were up by 38.2% from the previous month, household goods sales increased by 11.6% and department stores sales rose by 26.0%. However, the surge in retail sales has been temporary. Prior to the Omicron outbreak, supply chain disruptions had already increased purchase costs for several Consumer Goods Retailing industries, such as Domestic Appliance Retailing and Pharmacies over the three years through 2021-22. This factor has reduced profit margins over the same period.
Australia reopened its borders to international students in December 2021. As the government has since lifted the 40 hours per fortnight work limit for international students, labour shortages are forecast to ease considerably. Furthermore, several major retailers have increasingly invested in supply chain management initiatives to combat the obstacles caused by the Omicron wave. As a result, revenue in the Consumer Goods Retailing subdivision is expected to grow at an annualised 3.6% over the three years through 2021-22.
8. Gyms
The Omicron wave of the COVID-19 pandemic has significantly affected the Gyms and Fitness Centres industry, with demand declining due to the growing number of COVID-19 cases and people’s fear of contracting the virus. Additionally, staff shortages have also hindered the industry’s ability to operate at full capacity. Many gyms already experienced a loss of staff during the initial stages of the pandemic, as they undertook cost cutting measures to survive during lockdown periods. The Omicron outbreak has exacerbated these issues. For example, many gyms and fitness centres have reduced operating hours, increased non-staffed hours or cancelled classes as a result of the current outbreak.
These demand and staffing issues are likely to limit gyms and fitness centres’ ability to earn revenue. In particular, revenue derived from personal training and classes will likely fall as a share of industry revenue due to the Omicron outbreak, as trainers may contract COVID-19 or need to isolate and, consequently, be unable to run classes. Additionally, revenue from casual entry is also likely to decline as a share of industry revenue as people are unlikely to attend industry establishments on a pay-per-visit basis while COVID-19 is so prevalent in the community. However, these streams account for less than half of total industry revenue, while membership fees generate over half of industry revenue. As membership fees are typically paid on a monthly or annual basis, the Omicron outbreak is unlikely to affect this revenue segment as heavily as other, partially protecting the industry. Additionally, industry operators have benefited from members being able to attend gyms and fitness centres during non-staffed hours and during quieter periods. However, the current outbreak is likely to greatly reduce the number of new memberships and cause existing customers to freeze memberships, negatively affecting the industry.
Staff shortages are expected to affect the Gyms and Fitness Centres industry less than other industries and sectors, such as hospitality and the arts. Many gyms and fitness centres can operate without a large number of staff, or even with no staff on the premises. Comparatively, hospitality and recreation venues typically require greater numbers of employees to operate, leaving them more exposed to staffing shortages due to the pandemic. However, the Omicron outbreak and associated demand decline and staff shortages are still anticipated to hinder industry operators, with revenue and employment expected to decline at an annualised 14.1% and 4.3% respectively over the three years through 2021-22.
For more information, to obtain a PDF copy of this special report or related industry reports, or to arrange an interview with an analyst, please contact:
Nikola Brajdic
Content & Media Manager – IBISWorld Pty Ltd
Tel: 03 9655 3835
Email: mediarelations@ibisworld.com
