Living with COVID means a slower rebound

As I see it, the main economic argument against the RBA easing monetary policy to offset the downturn from the current COVID/Delta outbreak is that the RBA’s long term forecasts look pretty good. In the Aug’21 SOMP baseline, the unemployment rate falls to 4%, and core (trimmed mean) inflation nudges up a little above 2% in Q4’23.

The August minutes say that the main reason to stick with their July tapering plans was that the impact of easing would hit when the economy was rebounding, in H1’22. But can we be so sure about the bounce? The RBA is putting a lot of hope in vaccinations. Their hope is that things go back to the pre-Delta path once a larger share of the population is vaccinated and things re-open.

But will they?

Delta gives is a reason to be pessimistic. The August SOMP baseline appears to be, essentially, the upside scenario from the May SOMP (with a few things taken out, temporarily, for the current outbreak). That upside scenario was associated with high confidence. Households had a lower savings rate and business investment was higher, as the post-COVID positive-spiral extended.

This was fair enough in July, given that Q1 data had been better than expected. Australia was basically operating in a (hubristic) post-COVID confidence bubble.

Delta popped that bubble. We went from 2% of people locked down in in early August, to over 60% today (Victoria just locked down the entire state). And the NSW Premier is now urging the people of NSW to “stay calm” as case numbers make new higher-highs (despite lockdowns) each day. This outbreak is much worse than the second Victorian outbreak of 2020 (chart courtesy of Mark the Graph).

We’ve given up on “Zero COVID” and are now being urged to “learn to live with COVID”. I think this may lead to some behavioral changes in the rebound.

People didn’t expect to be living with COVID in H1’21. So there’s been a a shock to expectations. That means there is a good reason to doubt that we’re going to get back onto the prior growth path.

The international data makes the point (see the two charts at the bottom).

Lots of people are getting COVID in places where vaccination rates are very high (first chart).

Higher vaccination rates most certainly reduce sickness and death — but they are unlikely to prevent record high Infections once Australia re-opens.

If people really don’t want to get COVID, even if they are vaccinated, they are going to be more cautious. I think that’s likely. So it’s going to be hard to get back onto the prior, pre-Delta, baseline.

This will be true even if lockdowns end — people pull back without having to be told. For example, you can see from US State data that movement was reduced even in States that didn’t lock down hard in 2020. Folks simply pulled their heads in when they didn’t like the odds.

There has to be an increased probability of that when Australia re-opens. Which means that both H2’21 (due to lockdowns), and the subsequent rebound (due to lingering Delta), are likely to be weaker than the RBA hopes.

And while you might observe that the US and UK are growing reasonably, that’s because they are so far below the pre-COVID high-water-mark that there’s re-opening delta to be had, despite endemic COVID.

That’s not true in Australia (or NZ). We had bounced most of the way back, and were operating in a post-COVID bubble. We should expect less from an endemic-COVID recovery.