Borderline economy

Is Australia’s recovery really dependent on reopening the international border?

17 May 2021 | Shane Oliver, AMP Capital 

Angst around this got a new lease of life after the Budget assumed the border would not reopen until next year with jokes about Australia becoming a new “hermit kingdom” or “the lost kingdom of the South Pacific”.

Everyone wants the freedom to travel out of and back into Australia and an open border is key to having a dynamic economy over the long term, but its short-term importance to the economic recovery should not be exaggerated.

First, the economy has likely already recovered back to pre-coronavirus levels. Second, Australia normally runs a trade deficit in tourism equal to 1% of GDP as we lose more from Australians travelling overseas than we gain from foreign tourists coming here. And now, that spending by Australians is trapped here benefitting the Australian economy.

Third, we normally run a trade surplus in education equal to 2% of GDP but with the pandemic we have lost maybe just half of that as many foreign students just went online. Fifth, while the loss of immigration means lower growth potential it doesn’t necessarily impact per capita GDP (and hence living standards) in the short term or recovery prospects (except for some sectors). Finally, a premature reopening before herd immunity is reached and we are confident vaccines will protect travelers from new variants, will risk reversing the recovery we have seen so far. 

Global COVID-19 slowdown

New coronavirus cases and deaths slowed further over the last week. Developed countries remain in a downtrend helped by vaccines (although Japan is a notable exception and still seeing a rising trend) and India continues to see signs of slowing momentum helped by reduced mobility.     

Despite ongoing scares in relation to outbreaks from the hotel quarantine system for returned travellers, new cases remain very low in Australia.

Meanwhile the vaccine rollout continues

Nine percent of the global population has now received one dose of vaccine, with six percent in emerging countries. Within developed countries the UK is at 54%, the US is at 47%, Europe is at 30% and Australia is at 11%. 85% of those in aged or disability care in Australia have had at least one dose and a deal for Moderna to supply its mRNA vaccine starting at 10 million doses this year adds to confidence that the rollout will speed up.

The collapse in in new cases, deaths and hospitalisations in Israel, the UK and the US indicate that the vaccines work. A key risk remains in some countries of further coronavirus breakouts (eg, of the Indian variant) if reopening proceeds too quickly before herd immunity is reached. That said herd immunity may be closer in some countries than the chart below suggests if those that have already been exposed and just adults only are allowed for.

Our Australian Economic Activity Tracker was little changed over the last week and so remains very strong indicating that recovery remains on track, despite periodic coronavirus scares. Our US Economic Activity Tracker edged slightly higher and our European tracker rose again but remains very weak. 

Equity markets fall

Share markets fell over the past week as US inflation data for April came in far stronger than expected raising fears of an earlier Fed tightening, before a rebound later in the week – partly helped by softer US retail sales which took some pressure off bond yields – pared losses.

So, despite the sharp fall earlier in the week, US shares only fell -1.4%. Eurozone shares lost -0.5% and Japanese shares fell -4.3%. Chinese shares bucked the global trend and rose 2.3%. The poor global lead also weighed on the Australian share market after it hit a record high early in the week, although it fell back by far less given that the threat of higher inflation is a bit less in Australia than in the US and given the higher exposure in the local share market to cyclical and value stocks that may benefit from higher inflation and interest rates.

For the week Australian shares fell -0.9%, and of course they missed out on a sharp rally in US shares on Friday. Bond and interest rate sensitive IT, utility, property and telco shares along with energy stocks led the declines in the ASX 200. Bond yields rose although not dramatically, and in the US and Australia they remain down from their highs earlier this year highlighting that the inflation scare had already been at least partly priced in.

German bond yields look to be rapidly heading towards being above zero though on the back of the improving outlook in Europe. Oil prices rose but metal prices fell. Iron ore price rose to a new record high before declining later in the week. The $A fell as the $US rose.  

After having run hard with investor sentiment becoming pretty elevated shares are vulnerable to a correction as we enter a seasonally weaker period that normally runs from around May out to September/October. The still intensifying inflation scare and the risk of a further bond market tantrum along with geopolitical risks – notably China tensions but also in relation to Israel and Iran – and possibly still more coronavirus setbacks could all be triggers.

However, as we have seen over the last 12 months corrections are hard to time and beyond the short-term correction risks our broad view remains that share markets will head even higher by year end supported by strong earnings growth and central banks remaining ultra-easy. Our ASX 200 forecast for year-end remains 7200, but having almost reached there early in the past week the risk is likely on the upside.

Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital

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