The Australian Economy in 2021–2022: The Virus Strikes Back

• Published date: 01 March 2022
• Author: Viet H. Nguyen,Tim Robinson,Sarantis Tsiaplias
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/1467-8462.12455

The Australian Economic Review, vol. 55, no. 1, pp. 5–24 DOI: 10.1111/1467-8462.12455

The Australian Economy in 2021–2022: The Virus Strikes Back

Viet H. Nguyen, Tim Robinson and Sarantis Tsiaplias*

Abstract

This article summarises developments in the

Australian economy in 2021. The recovery

that was underway from the COVID‐19

recession was interrupted by the second

wave of the pandemic and the associated

policy responses, particularly in Victoria and

New South Wales. We discuss the challenges

facing the Australian economy as it once

again re‐opens.

1. Introduction

By late 2020, COVID‐19 had been largely

suppressed in Australia. Many domestic con-

tainment measures, such as lockdowns, had

been relaxed, although international borders

remained closed. Outbreaks occurred sporadi-

cally but were managed with temporary,

short‐lived, measures. The economy was

recovering strongly, and in early 2021 some

of the support measures, such as the wage

subsidy JobKeeper, ended. Strong economic

growth internationally, as well as high com-

modity prices, provided support.

The emergence of the highly contagious

Delta variant in mid‐2021 halted the recovery.

Lockdown measures in the most populous

states were re‐introduced and persisted for

many months. New support measures were

introduced. Growth slowed internationally and

key commodity prices declined, weighing on

national income. Australian output fell pre-

cipitously in the September quarter. The

acceleration of the vaccination program, how-

ever, meant that the lockdowns measures could

eventually berelaxed and, in November, the re‐

opening of international borders commenced.

Inter‐state domestic travel restrictions, how-

ever, remain, withthe states following different

strategies to manage the virus.

Despite the sharp slowing in output, the

unemployment rate did not reach a high level

by historical standards. Instead, people left the

labour force and there was a more pronounced

increase in the underemployment rate, namely

those working less than desired. The under-

employment rate, however, remained consid-

erably lower than during the COVID‐19

recession in 2020.

* Melbourne Institute: Applied Economic & Social

Research, the University of Melbourne, Victoria 3010,

Australia. Corresponding author: Tim Robinson, email

<tim.robinson@unimelb.edu.au>.

Our thanks to Guay Lim, Ian McDonald and Ross

Williams for useful comments.

© 2022 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics

Published by John Wiley & Sons Australia, Ltd

The Australian economy once again is

recovering, although a high degree of uncer-

tainty surrounds the outlook. Macroeconomic

forecasting is always difficult, but currently it

is intricately linked to health policy, such as

policies limitingAustralia's vulnerabilityto any

new COVID‐19 variants. How existing macro-

economic policy responses to COVID‐19 are

unwound is also of importance.

In all, we expect the Australian economy in

the coming year to grow at a considerably

above‐trend pace (Table 1). Wage inflation is

expected to pick up, although little real wage

growth is anticipated.

This article is structured as follows.

Section 2 provides a summary of international

developments, particularly those pertinent to

the Australian economy. Section 3 sum-

marises domestic developments, with an

emphasis on those in the labour market and

the conduct of Australian macroeconomic

policies. In the final section, we conclude

and discuss some of the challenges facing the

Australian economy in the near future.

2. International Influences

‘Recent developments have made it abundantly

clear that we are all in this together and the

pandemic is not over anywhere until it is over

everywhere’. Gita Gopinath, International Monetary

Fund (IMF 2021)

The recovery in the international economy

continued in 2021. The emergence of the

Delta variant and the associated policy

responses, however, spasmodically impeded

the recovery in many nations. Such interrup-

tions may well continue until high vaccination

rates are achieved globally. Vaccination rates

are markedly lower in many developing

countries than in their developed counterparts

(Figure 1). China is a notable exception, with

a very high vaccination rate.

Economic growth has been highly varied

across countries. The United States grew

rapidly in the first half of 2021, supported

by the substantial fiscal stimulus and ongoing

expansionary monetary policy settings. While

some moderation in growth appears to have

occurred in the second half, it is likely to have

remained strong by historical standards, with

the labour market tightening. A pick up in the

number of people quitting their jobs, which

has become known as the ‘Great Resignation’,

has occurred. The Federal Reserve has

indicated a slowing in its quantitative easing

program, as have central bankers in several

other nations; in fact, a few have even

tightened their policy rates (for example,

South Korea and New Zealand).

The recovery in the Chinese economy

commenced relatively early; it did not con-

tract in 2020, unlike most other nations.

Growth slowed, but remained solid in the

Table 1 Indicators of Australian Activity (%)

2022

a

2021

b

MI

c

Low

d

High

d

GDP 4.3 4.1 2.6 7.5

Consumption 4.6 4.9 2.2 7.7

Unemployment rate 5.1 4.5 4.2 5.4

Wage Cost Index 1.9 2.6 2.2 2.8

Headline inflation 2.7 2.6 1.9 2.9

90‐day bill rate

e

0.1 0.3 0.1 0.7

10‐year bond rate

e

1.8 2.0 1.1 2.7

Notes: (a) Year‐average growth forecasts. (b) Estimates.

(c) MI denotes Melbourne Institute. (d) based on

published forecasts in Consensus Forecasts, December

2021. (e) as of December 2021.

Sources: Melbourne Institute, Reserve Bank of Australia

(RBA), Australian Bureau of Statistics (ABS) and

Consensus Forecasts.

Figure 1 Vaccination Rates in Selected Countries (%

of Total Population)

Note: Data up to 15 December.

1

Sources: Our World in

Data, Mathieu et al. (2021), author's calculations.

6 The Australian Economic Review March 2022

© 2022 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics