The closure of the border will reduce Australia’s potential output by around 2.5%. But this will be partly offset by higher productivity growth due to increased usage of technology and more employees working from home. And the usual red flags that have signalled a permanent loss of output ahead of previous downturns are mostly absent. The upshot is that a prolonged period of austerity may not be needed after all and the Reserve Bank of Australia should be able to tighten monetary policy before long.
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