Q&A: the outlook, with COVID-19

The pandemic continues to be the biggest disruptive factor in the global economy, but it’s not alone. Digitisation and environmental issues will also play a key role in shaping the outlook.

To discuss this, ANZ Chief Economist Richard Yetsenga and Senior Economist Adelaide Timbrell sat down for a rapid-fire conversation on the outlook and what it means for businesses.

They started by addressing how the current wave of lockdowns is impacting the Australian economy – and how it is different from 2020.

AT: In Australia, the year 2021 has had more COVID-19 cases and longer lockdowns than 2020 because of the impact of the very transmissible delta strain. But economic losses in this period will still be smaller than the initial period of restrictions last year. Australia’s gross domestic product in the third quarter will fall only half as much as the lockdown-related fall in GDP last year, despite more of the population being restricted for longer.

Increased certainty about ongoing fiscal support is helping household incomes and business confidence. Consumer confidence is more resilient than 2020 and the business investment outlook is stronger, with capital expenditure expectations rising.

In fact, businesses are already advertising for far more workers than before the pandemic. Unlike financially led economic downturns, we are seeing less spending due to physical restrictions, not financial ones. ANZ Research expects strong bouncebacks in spending once lockdowns ease.

When we look at the path out – it’s all about vaccinations. The quicker high vaccination rates are achieved, the earlier we’re likely to see lockdowns ease and a faster recovery in spending and economic activity.

Once we get to a point where lockdowns are over and the risk of iterative state-border closures are low, we’ll start to see more economic activity that requires planning, like travel-related spending or large events.

RY: Asia is also dealing with the delta strain, but the impact has been very different across the region.

Singapore is the global gold standard in terms of opening up with a low caseload. But roughly half the economies in the region won’t reach 75 per cent vaccine coverage until sometime in 2022, and that means the regional economy is going to stay patchy.

China is somewhat different. Low caseload, but so far striving to maintain zero COVID-19 cases. The policy focus, however, is on a significant shift to a range of distributional issues, and away from growth for its own sake.

Recent policy targets have focussed on tech companies, around data security and other issues.

This policy program seems to be about China focussing more on the type of economy, and in fact society, it wants, and less singularly on the size of that economy. Growth will be weaker as a consequence, and doing business more complicated.

Adelaide, what sort of structural legacy will COVID-19 leave in Australia, particularly around digitisation?

AT: Lockdowns have forced businesses to transform, so they can operate and reach customers when everyone is at home. And unlike lockdowns, the need for these transformations will be somewhat permanent.

Recent data from the Australian Bureau of Statistics show people like working from home and want it to continue. And businesses are planning for it as, well, they don’t have much choice.

With lower unemployment and underutilisation than before COVID-19, employees have more bargaining power, and they’re likely to use it to stay at home for at least part of their working week.

This will lead to a shift of economic activity to suburbs and regions, and away from the CBD. Many people are also investing in their home space – by upgrading or renovating – because their home now has the extra role of workspace. This puts more pressure on housing prices compared to when our homes were just homes.

We’ll also see more focus on the digital economy – more shopping online and more investment in online business operations, and less on, say, business travel. The more we work and spend money digitally, the fiercer competition is for sellers of goods and digital services, because location is no longer a constraint. This puts downward pressure on inflation.

As we adjust to living with COVID-19, we’re likely to see more demand from sectors that provide digital services and physical products, particularly products relating to the home. We may see a rebalance towards in-person spending as the vaccination rate increases, but as with all big economic events, things rarely go all the way back to ‘normal’.

RY: Digitisation is clearly impacting ANZ’s customers. The effects are likely to be widespread and also pretty sector agnostic. Who really isn’t being impacted by this?

That also creates a talent challenge. Certainly at ANZ Institutional, as a business we are working to harness the benefits of digitation to improve our business offering. Digitisation is also one of the drivers for low rates globally and the consequent margin pressure many are experiencing.

Richard Yetsenga is Chief Economist & Adelaide Timbrell is a Senior Economist at ANZ