Going for growth: The A-Z of Australia’s economic recovery

There is an absolute alphabet of economic possibilities facing Australia in the coming months, from ‘U’ and ‘V’ shaped recoveries, through to a second-wave ‘W’, or a prolonged ‘L’ convalescence. However, new PwC modelling shows that – with the right plans in place – Australia could recover to pre-COVID-19 gross domestic product (GDP) levels in a little over two years and to the pre-COVID-19 growth trajectory in five years.

The big news from PwC’s new Australia Rebooted analysis is that, if our nation was to grow its way to economic recovery by focusing on enterprise, GDP would sit $1100 higher per person than under an alternative, more insular approach.

The PwC modelling also reveals that COVID-19 will cost Australia $279 billion in national income in the first two years and, if we fail to make conscious policy changes, it will cost a staggering $127 billion more. In other words, if we don’t consciously look to do things differently coming out of the pandemic then COVID-19 will cost Australia $406 billion over the coming decade.

Nine forces of change

How we emerge from the the COVID-19 shock will be shaped by how we lean in to, or away from, the nine forces of change that we see developing:

1. Greater government involvement: Heading into the recovery phase, government at all levels will exert more influence over our lives and the economy than it has in decades, but what form will this influence take? Investor/owner, regulator, or reformer? The solution lies in finding the right combination of all three.
2. Debt and capital: Increased levels of government support lead to higher government debt and interest payments; meanwhile access to private capital may be limited given the uncertain situation. Can we grow with a debt hangover? There’s now an additional fiscal burden to manage.
3. Consumption behaviour: Household debt and financial hardship will dictate consumption behaviours during the recovery phase. Consumers will be increasingly cautious, digitally aware, and likely to change their spending to reflect their new economic reality.
4. Accelerated digitalisation and data reliance: Technology will be at the forefront of change, and increased digitisation will place higher expectations on Australia’s digital infrastructure and cybersecurity capabilities. Businesses that rapidly adapt to e-commerce and e-services demand will be in an enviable position.
5. Productive, flexible and distributed working: Pressure on unemployment levels will persist long into the recovery phase. So too will workplace flexibility. The way we work has fundamentally changed in the short period since social distancing was introduced and there’s no going back now. We’ve seen a rapid rise in remote working, and new high-tech skills will be required over traditional low-skill work to drive productivity growth.
6. Resilient supply chains: Significant disruption has affected nearly all layers of the supply chain, highlighting vulnerabilities and revealing exposures of current global supply chains.
7. Industry consolidation: With such large changes to business models likely, industry structure changes will follow. The balance of power in many industries is set to shift, and consolidations and divestments are likely. Some businesses will thrive, others won’t survive, and many will fundamentally change causing the basis for competition to be reset.
8. Tax reform: The Great Lockdown has undermined the ability of governments to raise revenue given the disruption to business and personal incomes, as well as changed consumption behaviours. Revenue headaches, combined with additional government expenditure, means governments will be challenged to reinvent their tax systems without stifling economic growth.
9. Migration: Australia is a highly desirable destination to live and work right now due to our relatively successful management of COVID-19. But international mobility is harder than ever before. Australia’s migration policy will shape productivity outcomes, and affect demand for housing and infrastructure.

The future of Australia’s economy depends on how governments, business and communities respond to these nine forces of change.

A tale of two nations: Fortress Australia or Enterprise Australia?

Australia Rebooted looks at how we can best shape national income, industry, household consumption and employment outcomes during economic recovery.

We modelled* two scenarios for a post-pandemic Australia:

1. Fortress Australia: characterised by insular decision-making and high levels of federal intervention in industry. In this scenario, a balanced budget is de-prioritised for the sake of increased expenditure, especially in critical infrastructure and health manufacturing. Protectionism, defence spending and tighter immigration are also high on the agenda.
2. Enterprise Australia: where smarter regulation and accelerated digitisation are the hallmarks. Merger and acquisition activity will rise, so too will private investment in technology. Meanwhile, industry will double down on globalisation, and the government will unwind fiscal stimulus and attempt to get the budget back in the black.

These two scenarios are not forecasts; rather they reflect the economic outcomes of various government, business and community responses to the COVID-19 crisis.

 So how do we actively improve outcomes for all Australians? The following forces of change will determine whether we veer towards insular Fortress Australia, or we go for growth under an Enterprise Australia approach.

The Australia Rebooted report looks at how our nation can plot a path back to prosperity. In the coming months, PwC is committed to continuing the conversation and being part of the solution.

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* To understand the trade-offs and relationships between the forces of change and economic outcomes in a post-COVID-19 economy, PwC used a consistent set of assumptions, as well as a consistent ‘exit point’ from the economic shutdown. That is, we assumed:

• the Australian economy will formally enter recession in Q2 2020
• restrictions are progressively loosened from mid-2020, and are substantially relaxed by the end of the year (except for restrictions on internationally travel)
• a return to growth in Q3 2020 without the need for ‘survival’ packages beyond this date
• public health and survival packages will prevent substantial, structural economic damage
• a second wave of COVID-19 cases does not occur.