Australia’s economy is rebounding strongly

The federal budget update confirms Australia’s economy is rebounding
strongly. Australians are now back working, spending and moving freely
across the nation.

The updated numbers are encouraging and better than what was expected at budget 10 weeks ago.

Unemployment is lower, GDP growth higher, and the bottom line has improved.

But the road ahead is challenging. Our recovery is very much
dependent on our continued success in containing COVID-19. While a
number of nations are facing renewed virus outbreaks and new lockdowns,
Australians are approaching Christmas with optimism and hope.

Consumer and business confidence are back at pre-COVID-19 levels.
Eighty five per cent of the 1.3 million Australians who lost their jobs
or had working hours reduced to zero at the start of the crisis are now
back at work.

The September quarter had an increase in GDP of 3.3 per cent – the
biggest quarterly rise since 1976. Australia’s economic recovery from
the COVID-19 crisis is forecast to be faster than previous recessions.

The unemployment rate is expected to return to its pre-COVID-19 level
in about four years – in contrast to the six years it took following
the 1980s recession, and the 10 years it took following the 1990s

In this update, real GDP is forecast to grow 4.5 per cent in 2021,
following a reduction of 2.5 per cent in 2020. This is an upgrade to the
budget forecast of 4.25 per cent growth in 2021, and a 3.75 per cent
fall in 2020.

Australia is outperforming all of the major advanced economies. The
euro area is forecast to contract 7.5 per cent; Japan 5.25 per cent, and
the United States, 3.75 per cent this year.

With 734,000 jobs created in the last six months, the labour market
has performed better than expected. Unemployment is forecast to peak at
7.5 per cent in the March quarter 2021, down from a peak of 8 per cent
forecast at budget.

The unemployment rate steadily declines to 6.25 per cent by mid-2022,
5.75 per cent by mid-2023, and 5.25 per cent by 2024, when it
approaches the level it was at the start of this year.

We have come a long way from Treasury’s initial estimate early on in
the pandemic that the unemployment rate could hit 10 per cent by
year-end or 15 per cent in the absence of JobKeeper.

This improved outlook follows an unprecedented level of economic
support from the Morrison government. Of $251 billion of direct economic
support committed, over $138 billion has flowed to households and

JobKeeper, the Coronavirus Supplement, the Cash Flow Boost, and three
Economic Support Payments to pensioners and other eligible recipients
have been an economic lifeline for millions of Australians.

The faster-than-expected rebound is flowing through to the budget
bottom line. The underlying cash deficit is expected to be $197.7
billion, or 9.9 per cent of GDP in 2020-21, an improvement of $15.9
billion of expectations at budget. The total improvement across the
forward estimates since budget is $23.9 billion.

Payments are expected to be $6.5 billion less in 2020-2021 than at budget, and receipts $9.4 billion better.

There is new expenditure on a number of initiatives including an
additional 10,000 home care packages, the rollout of vaccines, and the
temporary extension of the Coronavirus Supplement.

The improved economic outlook has led to an increase in expected
company tax receipts and GST collections, and around 640,000 fewer
people on JobKeeper so far in the December quarter than expected at

The gross and net debt projections are broadly in line with those at
budget, with gross debt stabilising at 53 per cent and net debt
declining to 38.3 per cent over the medium term. Australia’s debt
levels, even at their peak, remain less than half the average seen
across advanced economies today.

Underpinning the mid-year economic and fiscal outlook (MYEFO)
forecasts are our continued prudent commodity price assumptions with an
iron ore price assumed to fall from high levels to $55 a tonne in the
September quarter of next year – a quarter later than assumed at budget.

Assumptions around slower population growth, negative net overseas
migration, and the timing of the opening of international borders are
unchanged since budget. So too, the timetable for the national rollout
of the vaccine, which is expected to be fully rolled out by late 2021.
There do however remain downside risks to Australia’s economic recovery.

These include the timing, distribution and effectiveness of the
vaccine in stopping the spread of the virus globally, trade tensions
that limit Australia’s access to export markets and domestic economic
uncertainty that could lead to higher household savings and lower

That all being said, the budget update provides further cause for optimism that Australia’s economic comeback is under way.

Opinion Piece for The Australian Financial Review, 17/12/20.

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