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Business Outlook: boosters versus Omicron

Deloitte Access Economics’ latest Business Outlook suggests that 2022 will be another year of Australia’s economy dodging COVID bullets – but probably successfully so.

Australia is much more match fit for fighting COVID in 2022 than we were in 2020, or even in 2021.  We are generally very well vaccinated, we’ve got the hang of juggling lockdowns and other COVID challenges, and many households have increased their savings from when the pandemic meant that money couldn’t be readily spent. That combination spells resilience and recovery.

But Omicron has gone vertical, and it won’t be the last mutation for us to fight.  China’s economy has softened in ways that particularly challenge Australia’s economy.  And financial markets have wrested control of the cost of money away from the RBA, notably raising the cost of two- and three-year fixed rate loans at a time when borrowings have leapt.

For all its challenges, 2021 saw the fastest growth in the Australian economy since 2007, making it the second fastest in the past two decades.  Deloitte Access Economics sees 2022 as a similar story, with Australia’s economic growth remaining above average as pandemic damage to the economy continues to be repaired.

We’re forecasting growth of 3.6% in 2022 (as shown below – in terms of real Gross Domestic Product – GDP). The largest driver of this growth is expected to be household (consumer) spending. Consumers also drove the economic recovery in the first half of 2021, as government support measures enabled the incomes of many households to keep afloat.

Business investment is also forecast to contribute to Australia’s economy in 2022, supported by low interest rates and targeted government incentives. It has finally crawled its way back to above pre-COVID levels, although never actually dropped more than 5% below where it was when the pandemic hit.

Growth in public sector spending is forecast to slow in 2022, but that’s mostly because pandemic-related support measures are winding back. Consumer spending is expected to support continued strong growth in the value of imports. And while the prices of Australia’s major commodity exports have shot up in recent times, volumes of exports have declined. So the overall value of what we export out of Australia is forecast to grow fairly well through 2022, but to a much lesser extent that what we import.

Figure 1: Australian economic growth forecast for 2022

Source: Deloitte Access Economics Business Outlook

Since the start of the pandemic, Australia’s economy has also splintered very much along state borders, but 2022 will start to see the return of the nation – that is, as Australia has moved to a ‘living with the virus’ strategy. Economically, that will show up as the states hardest hit by COVID (NSW and Victoria) close the gap with those that have seen their economies prosper (Tasmania, Western Australia and South Australia).

Figure 2: Forecast economic growth for 2022 by state and territory

Source: Deloitte Access Economics Business Outlook

Of course, other countries are also grappling with their COVID management approach, and one that will always be important to focus on (given its importance to Australia’s economy) is China.

The infectiousness of Omicron suggests China may also need to move to a ‘living with COVID’ strategy. However, if China struggles with that change in policy (as cases multiply and long lockdowns in many cities cause enormous harm to its already slowing economy), that could result in 2022 making a mess of its economy. And with that would come a range of blowback impacts on Australia’s economy as well.