As the Omicron variant sweeps the nation, rising COVID-19 cases have begun to suffocate Australia’s supply chains and created widespread staff shortages. For a country like Australia, this could not have occurred at a worse time. In what is known as the “Great Resignation”, there has been a significant rise in the number of individuals quitting their jobs all over the world. In fact, the Bureau of Labour Statistics revealed that 4.4 million people quit their jobs in September of 2021 in the USA - a trend that may occur in Australia. With these two events in mind, this week’s article will consider the potential effects of supply shortages in Australia, and explore the implications for Australia’s trade balance.
How COVID-19 and global worker unrest have suffocated Australia’s national supply chains
The “Great Resignation” is a term used to describe the record level of workers exiting the workforce throughout 2021. Whilst there are a variety of reasons for this trend, there are two main causes of this phenomenon. Worker burnout is one of them. In October 2021, Limeade conducted a survey with 500 Australian-based full-time employees working across 500 companies, discovering that 29% of respondents resigned due to burnout caused by WFH (working from home) procedures.
Ironically, another cause of this trend is the increased desire to work remotely. According to the same Limeade survey, 40% of job changers enjoyed the flexibility of WFH and want to work remotely at companies that could facilitate this desire. This is supported by the Australia Talks National Survey 2021, which reveals that the amount of people WFH full-time has tripled from 4% to 12% in 2021.
Clearly, a substantial number of individuals left the workforce in 2021. From June to September 2021, Australia’s participation rate fell by 1.5% according to the ABS. However, this was before the Omicron variant swept the nation, with national cases peaking at 849,833 on the 8th of January, 2022, causing subsequent impacts on consumer confidence. It is due to the combined effects of the “Great Resignation” and distorted consumer confidence that supply chains are currently strangled, supermarkets are struggling and employers are failing to make ends meet.
Two years ago, rampant panic-buying (again, a product of worsening consumer confidence) led to supply shortages across supermarkets, limiting the public’s access to essential goods, such as toilet paper. However, these shortages were localised and were mainly driven by strong levels of demand from consumers.
Now, amidst the spread of Omicron, Flavio Macau, Associate Professor at ECU, argues that demand is not the main driver as supermarket shortages are a result of supply issues and a lack of transport workers. Macau believes that transport, distribution and shop workers have been required to isolate, limiting their ability to supply goods to local supermarkets and limiting available supply for consumers.
This is echoed by the Transport Workers’ Union, who say that a third to half of Australia’s truck drivers are off work. Not only are goods not being delivered to supermarkets, but in-store workers at supermarkets aren’t available. Woolworths chief executive Brad Banducci stated that more than 10% of in-store workers are absent.
Distribution centres are struggling to supply supermarkets with an adequate supply of essential goods, such as poultry foods, causing consumers to panic-buy to avoid “missing out” amidst the widespread shortages. Woolworths and Coles have been forced to place limits on products, such as painkillers and toilet paper. Poultry producer Ingham’s said that “the rapid spread of Omicron and the resulting staff shortages had hurt supply, logistics and sales”, clearly demonstrating the impact of supply chain shortages on supermarkets.
With a lack of aggregate supply across Australia and sudden demand-pull inflation, Australia’s underlying inflation level has risen to 2.1% - the highest level in seven years. The trend in inflation is no surprise - the Federal Reserve confirmed that the US saw 7% inflation in December alone. The AMP’s chief economist, Shane Oliver, argues that rising US inflation is an “early indication of what we could see in Australia”. His comment mainly revolves around the fact that the circumstances which are prompting the high levels of inflation in the United States are being mirrored to a lesser degree within Australia.
Higher inflation isn’t necessarily a bad thing for Australia - we have failed to reach our national objective of 2-3% inflation in recent years. However, due to the lingering impact of stagnant wages growth, captured by the ABS’s recent calculation of annual wages growth at 2.2% during the September quarter in 2021, it highlights the threat of a decline in real wages, which occurs when inflation outpaces wages growth. Senior researcher at the Parliamentary Library, Geoff Gilfillan, has noted that periods of lower real wages have been outperformed by periods of higher real wages in terms of economic growth, indicating that AD-driven growth will be worsened by the higher rates of inflation.
But what about Australia’s trade balance?
Australia has already been forced to turn to other countries for a solution to their supply chain difficulties. Following the outbreak of the Delta variant, Australia has seen its BOGS fall from $13.6m in July 2021 to $9.4m in November 2021, as it relies on other nations’ imports to replenish its lack of national supply. This is partly driven by the fact that Australia’s workforce has structurally transitioned from intermediary goods markets to tertiary markets, including sectors such as education and tourism which have been severely impacted by COVID-19, as highlighted by our recent article - [HSC] Economist: 4 October. Thus, Australia’s trade balance - which has already been harmed by lower demand for its exports - will be worsened by the increased national demand for imports, indicating that the downward trend in the BOGS balance has a high probability of continuing.
Looking beyond the current account, there is already a clear trend indicating a decline in export demand in Australia. Since peaking at 0.80 AUD in February 2021, the exchange rate has since declined to a low of 0.70 AUD in December 2021, before stabilising at 0.72 AUD in January 2022. Whilst this trend can be attributed to a number of factors, including global uncertainty associated with both the Delta outbreak and the Omicron outbreak, supply chain issues in Australia have certainly contributed to the unavailability of exports from Australia and the subsequent decline in demand for them. This worsens the demand for the AUD, which is needed to purchase the items from Australia, causing a depreciation in its value.