Why the Australian Economy May Not Recover as Quickly as Forecast

In our article last month, we forecast a scenario where those states with COVID infections would progressively relax restrictions at 70% and 80% vaccination rates, but those states that were COVID free would likely attempt to remain so by keeping their borders fully closed until there were economic and social benefits to letting the virus circulate within their communities. 

With NSW re-opening on 11 October after hitting its 70% vaccination targets, other states (excepting those that are COVID free) are expected to follow NSW when they hit their own vaccination targets.  If the NSW hospital system becomes overloaded and cannot cope with an explosion of cases, we would expect other states to hold back and sufficient restrictions to remain in force.

A policy mistake would be to open up too quickly, have the hospital system overloaded and then have to re-impose restrictions.  A policy success would be to open up progressively to the point the hospital system was “fully utilised” and restrictions were such that hospital admissions were stable.

At this stage with case numbers low and falling in NSW, but rising in Victoria, it may be that if problems emerge they first come to light in Victoria rather than in NSW.

Forecast and Economic Implications

We believe the risk of having to slowdown the opening of the economy to prevent an explosion of cases is being understated by politicians, given the electoral pressures they are under particularly those at the federal and NSW state levels.  We believe the Australian population has not been sufficiently prepped to accept “unnecessary deaths” being defined those who die because they could not access care because the hospital system has been overloaded

As a guide to what restrictions will be necessary and the death rates that will be tolerated, we make a comparison with the UK where cases are still running at around 285,000 new cases and 830 deaths per week as at mid October.  This represents 12 deaths per 1 million of population per week, roughly three times the current death rate in Australia of 4 deaths per 1 million of population per week[1].  A comparable death rate might be acceptable in Australia as reactions to the record 15 deaths in NSW on 28 September and the recent high of 13 deaths in Victoria on 11 October were muted, although we argue below with the same low level of ongoing restrictions as the UK, the death rates in Australia will likely be much higher and therefore tighter restrictions than those currently in force in the UK will likely be needed in Australia to keep death rates per 1 million of population comparable to those in the UK.

The UK figures clearly demonstrate vaccination does not prevent citizens becoming infected and transmitting it to others when Public Health and Social Measure (PHSM) restrictions are low; rather vaccination is more effective at preventing serious illness.  This in turn means the most vulnerable are those that are unvaccinated or have no “natural immunity” through previous infection. 

Vaccination rates are currently comparable between the UK and Australia (72% single dose and 66% double dose of the total UK population as compared with 71% single dose and 55% double dose of the total Australian population[2]), but more importantly as per the chart abelow data from those donating blood in the UK shows that 98% of the population[3] now has COVID antibodies either acquired through a previous infection (natural immunity) or through vaccination.  This high level of “natural immunity” is due to the UK recording 8.4 million positive tests since the start of the pandemic as compared with 143,000 positive tests in Australia[4].  Compared with the UK, the number of citizens with protection through previous infection in Australia is therefore likely to be very small and less than 1% of the population as compared with the 20% to 30% in the UK as per the chart.

The key message is that despite focus on vaccination rates, only around 2% of the UK population is actually “unprotected” as compared with a possible 20% in Australia if and when Australia reaches 80% double dose vaccination (this being due to the far higher rates of “natural immunity” from prior infection present in the UK).

On a simple model of only the “unprotected” being vulnerable to serious illness and death, Australia’s death rate per million of population could therefore be ten times higher than that currently being experienced in the UK with the same level of restrictions and by implication the pressure on its hospital system could potentially ten times higher as well simply because Australia has ten times as many “unprotected” citizens as a percentage of population. 

Given the UK’s death rate is already three times that of Australia, if ten times as many people are “unprotected” in Australia with the same level of restrictions as the UK, Australia’s death rate could climb to thirty times its current one if cases rise from the current 600 per 1 million of population to the UK’s 4,000 per 1 million of population[5].  Such a death rate would be politically unacceptable (in an election year) and would almost certainly cause the hospital system to be overloaded given the many reports of hospitals currently being “strained”.  

Our conclusion is therefore restrictions will remain at whatever levels necessary to keep the hospital system from being swamped with cases.  Keeping case numbers low will mean the virus will spread only very slowly throughout the population.  The downside of this scenario is the virus will then take a much longer time to infect everyone in Australia.

With no restrictions, COVID spreads very quickly as even the previously infected or vaccinated get infected/re-infected and pass it on to others.  Hence for every Australian citizen it is not if, but when, they become exposed to or infected with COVID-19 in the same way it is hard to avoid exposure to the seasonal flu (but vaccination reduces the chances of symptomatic infection and serious illness).

In summary, we see a risk of a potential economic drag for months or even years due to the need to keep COVID cases contained at manageable levels as infections spread progressively throughout the Australian population.  The exact level of restrictions necessary to have an orderly spread of cases and prevent an “explosion” of cases will become clearer as NSW and Victoria progressively open up.  If the degree of restrictions is higher than expected and the restrictions have a meaningful economic impact, this will likely mean interest rates will be lower for longer and the economy will recover more slowly than forecast. 


[1] www.Worldometers.info website as per 18 October 2021

[2] As at 16 October 2021 www.ourworldindata/org website

[3] The population that gives blood being representative of the healthy adult population, but this can perhaps be extended to the population as a whole given children are less at risk than adults.  Graph sourced from The Economist

[4] As at 18 October based on Worldometers website

[5] As at 18 October based on Worldometers website

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