Newspaper icon
The latest issue of Financial Standard now available as an e-newspaper
Chief economist update: Australia's virtuous cycle keeps on turning

Despite some delays and hiccups in the roll out of the coronavirus vaccine in Australia, cases of infections are virtually next to nil and life had slowly been returning to pre-pandemic normal.

So much so, that in its 'Economic Outlook' March 2020 quarter interim report, the OECD upgraded Australia's 2021 GDP growth forecast by 1.3 percentage points to 4.5%.

With the Reserve Bank of Australia (RBA) maintaining its guidance to provide continued policy support, the AztraZeneca COVID-19 vaccine being produced locally by CSL, and the flow on from stronger overseas growth, chances are Australia's GDP growth could be revised even higher.

The latest Australian Bureau of Statistics (ABS) 'Labour Force' report shows total employment is 1800 scalps short of the tally recorded last year before the pandemic and the unemployment rate dropped to 5.8% - the lowest level since March 2020.

This is good news for the Morrison government which just ended JobKeeper and coronavirus supplements to welfare recipients on March 28. It's still early days, but recent indications are that negative repercussions - particularly, on the labour market—would be limited.

This is because workers' reliance on the subsidy has already been declining. The Australian Taxation Office (ATO) reported that the number of employees availing of JobKeeper dropped by 57.2% in the December 2020 quarter from the second and third quarters of last year.

If correct, Australia's virtuous cycle would keep on turning. For not only is the strong recovery in Australia's job markets boosting consumer and business confidence, it's also providing a positive impact on the government budget in terms of higher income taxes - personal and business - and reduced welfare payments.

According to the Australian Financial Review: "The pace of the improvement sets the government up for earlier budget repair, with the deficit likely to be just over $150 billion by June - well below the $197.7 billion projected in the mid-year update."

The persistent increase in iron ore prices also provides a positive underpinning to Australia's budget balance. Iron ore prices have risen by 7.4% to US$167.34/metric tonne this year to date adding to last year's 70.3% surge.

Needless to mention, the rise and rise in iron ore prices is due to China's strong growth- the world's biggest importer of iron ore.

In its Mid-Year Economic and Fiscal Outlook (MYEFO) handed down in December 2020, the Treasury forecast that iron ore prices will drop to US$55.0 per tonne by the end of September 2021 quarter. Iron ore prices are now more than three times that.

Sensitivity analysis conducted by the Australian Treasury in the 2020-21 Budget shows that for every US$10/tonne increase in the price of iron ore from the forecast US$55/tonne, improves the budget bottom line by A$3.7 billion.

However, the Budget may not be able to reap the full benefits of elevated iron ore prices because of the ongoing diplomatic and trade tensions between Canberra and Beijing, which has already prompted China to impose import restrictions on Australian products.

The latest international merchandise trade data show that Australia's total exports to China dropped by 8.0% in February 2021 from a year ago, with iron ore exports dropping by 12.0% - worse, China's reportedly been exploring alternative suppliers for its iron ore needs.

Then again, Australia had already been operating with reduced demand from China - zero tourists and students due to the closure of international borders - and other countries for more than a year and it's survived ... handsomely.

Read our full COVID-19 news coverage and analysis here.

Read more: JobKeeperAustralian Bureau of StatisticsAustralian Financial ReviewAustralian Taxation OfficeReserve Bank of Australia