Vaccine to reduce need for further monetary stimulus - Capital Economics
Australia & New Zealand Economics

Vaccine to reduce need for further monetary stimulus

Australia & New Zealand Economics Update
Written by Marcel Thieliant
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Australia and New Zealand will benefit less than other advanced economies from a vaccine due to their success in containing the virus. Even so, we’ve lifted our 2021 GDP growth forecasts a bit and no longer expect the RBA to expand quantitative easing once the current programme expires in April. And the RBNZ probably won’t resort to negative interest rates.

  • Australia and New Zealand will benefit less than other advanced economies from a vaccine due to their success in containing the virus. Even so, we’ve lifted our 2021 GDP growth forecasts a bit and no longer expect the RBA to expand quantitative easing once the current programme expires in April. And the RBNZ probably won’t resort to negative interest rates.
  • Our forecasts had already assumed that the virus will be controlled by 2022, but we now expect that a vaccine will be available by Q2 2021. While it’s not clear whether sufficient doses will be available to vaccinate everyone, we think that at least health care workers, the elderly and other vulnerable people will get a shot by the middle of next year.
  • Admittedly, Australia and New Zealand have had greater success in containing the virus than most countries. Australia still has some social distancing rules and internal border closures, but we had already assumed that consumption would return to pre-virus levels by mid-2021. Meanwhile, New Zealand has removed all domestic restrictions on activity and domestic demand may already be above pre-virus levels.
  • However, there are two reasons why a vaccine will provide an additional tailwind. First, it should allow a full re-opening of the border. We had already assumed that the border would reopen by mid-2021, but we had assumed that Australia’s net migration will only return to pre-virus levels by 2023. A widely available vaccine means that immigration will rebound faster, bolstering GDP growth.
  • A full re-opening of the border should also bolster exports of education and travel services. The former matters more for Australia, while the latter matters more for New Zealand. However, we suspect that the resumption of international tourism won’t provide as big a boost to New Zealand’s GDP as the 3%-pt slump in net travel exports in Q2 would suggest. After all, we suspect that New Zealanders will shift back spending from goods to overseas holidays once the border reopens.
  • Second, a vaccine should bolster business confidence and support business investment. We’ve revised up our 2021 forecast for business investment from 3% to 6% in Australia and from 9% to 11% in New Zealand.
  • All told, we’ve lifted our forecast for 2021 GDP growth from 4.0% to 4.5% in Australia and from 5.5% to 6.0% in New Zealand. Both forecasts are well above the analyst consensus. We’ve lowered our 2022 forecast for New Zealand from 3.0% to 2.7%, but still expect Australia’s economy to expand by 3.2%. (See Chart 1.) That means that the head start New Zealand has gained due to its greater success at containing the virus will dwindle but won’t disappear completely by the end of our forecast horizon. (See Chart 2.)
  • We haven’t made any changes to our labour market forecasts but the key point is that we already expect Australia’s unemployment rate to fall faster than any economist polled by Bloomberg. As such, the RBA probably won’t expand its quantitative easing programme when it expires in April. And the RBNZ may not have to resort to negative interest rates. (See our forthcoming Update.)

Chart 1: Real GDP Growth (%)

Chart 2: Real GDP (Q4 2019 = 100)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


Marcel Thieliant, Senior Australia & New Zealand Economist, marcel.thieliant@capitaleconomics.com