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Guides / hsc economist

[HSC] Economist: 18 October

This fortnight's economics news; NSW re-opening and the Global Economy!

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After much anticipation, NSW has finally exited lockdown! How will the economy recover, and will the economy fare the same as the last time we exited a lockdown? Furthermore, how will this impact Australia’s relationship with the global economy as it aims to further engage in international economic integration, driven by processes such as service export trade?
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NSW Easing Restrictions for Fully Vaccinated Australians

Last week, fully vaccinated people in NSW emerged from a lockdown lasting over 100 days, with multiple flow-on effects on the economy. The lockdown has substantially impacted businesses’ ability to generate income, particularly SMEs (in the form of restaurants, pubs, hair salons, etc) which make up 99.8% of businesses in Australia, and provide 67% of Australia’s total private sector employment.  
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1. So What Will be the Impact on the Domestic Economy?

Economic Growth

  • Aggregate Demand and its components: Y = C+I+G+(X‚ÄďM)
  • Trends in the Business Cycle

Unemployment

  • Types and causes: Cyclical

While it is important to note that the benefits of lockdown ending will be mainly concentrated in NSW, the state accounts for nearly a third of Australia’s total economic output. Undoubtedly, aggregate demand (AD = C + I + G + (X - M)) will rise, especially through increased consumption by consumers in the services sector, which accounts for nearly 80% of NSW’s economic activity.  Another factor is that demand has steadily built up while consumers were unable to access many of these services during lockdown. Consumer confidence has therefore steadily increased for the sixth week in a row, 1.6% in the last week, pointing towards higher household expenditure levels as NSW exits lockdown.

Economist Tapas Strickland, director of economics at NAB, has pointed out that service sector businesses have suffered immensely due to the restrictions, with areas such as transport, hotels, cafes and restaurants, health, recreation and culture being worst-hit when compared to pre-pandemic levels of spending. NAB’s index of Australian household consumption and investment spending has recorded a 7.3 point drop from 100 in 2019 to 92.7 during 2021.  Investment by business to meet the increasing post-lockdown demand by consumers is predicted to contribute to an increased level of total expenditure, and thus more economic growth. From this increase to aggregate demand, unemployment and underemployment are expected to decline as well, because labour is a derived demand.

However, experts believe that there is a level of uncertainty surrounding the level of consumption, especially in comparison to when the initial lockdowns were lifted in 2020, where consumer confidence had immediately shot up, followed by aggregate demand and growth. ¬†RBA director Dr. Phillip Lowe reinforces this sentiment, emphasising ‚ÄúThere is ‚Ķ uncertainty about the timing and pace of this bounce-back and it is likely to be slower than that earlier in the year.. much will depend on the health situation and the easing of restrictions on activity.‚ÄĚ He highlights the key difference in how consumers will not be entering a COVID-free environment as well as the absence of mechanisms such as JobKeeper compared to the previous lifting of lockdown, thus consumer sentiment will be difficult to ascertain.

Tapas Strickland also believes that while there has been a surge in demand for services, such levels are unlikely to be prolonged, and will most likely revert to ‚Äúprevious levels‚ÄĚ. However, the conclusion of the lockdown and easing of restrictions will most definitely set a foundation for consumption and economic levels to regain momentum in the long-term. This is supported by the head of Australian Economics at Commonwealth Bank, who reinforces that ‚ÄúThe good news is that by the middle of next year, Australians are likely to have adjusted to ‚Äúlife with COVID-19‚ÄĚ, allowing for increased levels of consumer confidence, and by extension, economic activity and economic growth.
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2. What About Australia’s Relationship with the Global Economy?

International Economic Integration

  • The Global Economy
  • Globalisation

Globalisation and economic development

  • Income and Quality of Life indicators

The ending of NSW’s lockdown will help prepare the economy for international travel. As per the previous HSC Economist, the re-opening of international borders will allow service exports such as tourism and education to begin to recover. The new premier Dominic Perrottet has put NSW firmly behind the plan, announcing that fully vaccinated NSW residents will be able to travel overseas from November 1 (increasing Australia’s imports and leakages from our economy), and that quarantine will not be required for fully vaccinated travellers.

However, because opening up will facilitate faster container ship and aircraft turnaround times, goods and services from overseas will be cheaper and more readily available and the quality of life for Australians will improve through increased material living standards. This is supported by DFAT noting that ‚ÄúOpening up some service sectors to competition gives Australian consumers access to a wider range of services and more national and international expertise‚ÄĚ.

All in all, re-opening international borders will be beneficial for the service sector as it is a prominent aspect of Australia’s trade exports, accounting for around 40% of Australia’s export earnings in 2016.

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