The impact of Covid on the Australian economy

Two years after Covid first became an international headline, the Australian economy is continuing its recovery.

In general, it’s performed better than most, courtesy of low-interest rates and government stimulus. For retail, this has ensured Australian consumers have had extra cash in their pocket to ride out a turbulent time.

So what point is the Australian economy at now, what’s on the horizon in the period ahead, and how will this affect retail?

impact of covid on the australian economy
April 13, 2022


The Federal budget

On March 29, the Australian Government handed down its federal budget for 2022/23, with the rising cost of living high on the government agenda.

Although the economy is better positioned than expected, Treasurer Josh Frydenberg noted rising fuel prices and increased grocery costs were hitting the hip pocket of most Australian families.

The Treasurer explained the country’s economic position is now $100 billion better off than it was this time last year.

Stimulus such as JobKeeper has been wound back, while income from mining has helped bolster the government coffers.

“The deficit for 2022‑23 is expected to be $78 billion, or 3.4 per cent of GDP. Over the next three years, this will more than halve to 1.6 per cent,” Mr Frydenberg said.

But with ongoing Covid-related supply shortages and with the war in the Ukraine impacting petrol prices, he also announced initiatives to ease the financial stress including a cost of living package and an immediate halving of the fuel excise.

Both were designed to give Australians more money in their pockets.

The government also pledged to address ongoing supply shortages with incentives that are designed to bolster Australian manufacturing.


Monetary policy

Reserve Bank of Australia (RBA) Governor Dr Philip Lowe has also noted the resilience of the Australian economy over the past couple of years.

Recently addressing the AFR Business Summit, he explained the December quarter saw GDP increase by 3.4 per cent, which was one of the biggest quarterly increases on record.

impact of covid on the australian economy

“Over the final months of the year, there was a very strong bounce-back in household consumption following the mid-year Delta lockdowns.

“Over 2021 as a whole, the economy grew by 4.2 per cent, taking the level of GDP to 3.5 per cent above its pre-COVID-19 level.

“This is a very good outcome by global standards, which is something we should not forget.”

However, he also recognised uncertainties remained. Covid continued to be a global threat, while the war in Ukraine also presented a risk to the economy.

With employment currently at 4.2 per cent, he said the labour market was positive and that trend was likely to continue with forecasts unemployment could soon reach an almost 50-year low of 4 per cent.

That said, wage increases are not keeping pace with inflation, meaning ultimately more Australians are working but have less disposable income at their fingertips.

Australia’s headline inflation is current 3.5 per cent, and 2.6 per cent in underlying terms.

This is far less than other major economies, including the US where household gas prices are up by nearly 25 per cent over the past year, electricity prices are up by more than 10 per cent, and goods prices have increased 9 per cent.

In Australia, goods prices have risen 3 per cent, Dr Lowe explained.

“In the United States, there was a very strong surge in demand for goods during the pandemic and firms had trouble meeting this due to supply-chain problems and, in some areas, a shortage of workers. The result has been a big increase in prices.

“The same general dynamic has been at work in Australia, but the surge in demand for goods has been less pronounced here and the pandemic has not had the same effect on the availability of workers.”

However, rising inflation is on the RBA’s radar and would be one of the contributing factors to any intended interest rate hike.


Interest rates

Throughout the pandemic interest rates have been at a record low of just 0.1 per cent. This has resulted in rising property prices and increased consumer spending.

Coupled with less expenditure on holidays and entertainment, this has also resulted in net worth per capita skyrocketing from $428,000 in June 2020 to $522,000 in June 2021.

impact of covid on the australian economy

However, many predict rising inflation and low unemployment will see the RBA raise interest rates later this year, then continue to hike them incrementally over the following months.

For homeowners, this will be the first interest rate hike in over a decade, and there are predictions that, when combined with the rising cost of living, some will experience financial stress.

In fact, a recent survey by Canstar of more than 900 mortgage borrowers from January to February showed one-third are close to the edge, while 14 per cent were already at their limit.

Meanwhile, 19 per cent of respondents indicated a weekly increase in living costs of up to $100 would be enough to create financial stress.


Retail statistics

In the meantime, retail data from the Australian Bureau of Statistics indicates retail expenditure has been steadily rising since July last year.

Their latest February data shows an increase of 1.8 per cent month-on-month and a rise of 9.1 per cent compared with February 2021.

Among the major winners were: Household goods retailing (up 2.3 per cent by $136.8 million); clothing, footwear and personal accessories (up 11.2 per cent by $282.6 million); department stores (up 11.2 per cent by $175.9 million); and cafes restaurants and takeaway food service (up 9.9 per cent by $395.6 million).

Meanwhile, food retailing was down 2.6 per cent (-$340.2m), and other retailing was down 1.1 per cent (-$57.2m).


Consumer sentiment

Despite all that’s going on in the world, CommBank’s Household Spending Intentions Index rose 1.8 per cent in February.

impact of covid on the australian economy

They noted this was driven by solid gains in home buying intentions and transport and an uptick in household services and fitness.

That said, they noted the Retail index was down 8.4 per cent in February.

“…this is less than the average February seasonal decline, indicating some strength.”


What’s ahead

The increased cost of living, a looming federal election, and a hike in interest rates will all play a role in what’s ahead for retail in the months to come.

Cash initiatives for low and middle income earners along with tax offsets that were announced in the federal budget might see short term benefits for retail.

The real test will be the longer-term impacts of inflation and a rising interest rate.