Travel bubble brings Australia out of isolation
- The establishment of a travel bubble between New Zealand and Australia is more symbolic than economic
- Economically Australia could arguably benefit more by persuading domestic tourists to spend their money at home
- RBA is not expecting to increase interest rates until 2024 at the earliest despite strong labour market performance over the last months
- The end of the JobKeeper program hangs above the labour market like the sword of Damocles, with the prospect of a rise in unemployment towards 7.8% in our most pessimistic scenario
- These labour market developments partly explain the RBA’s caution on raising interest rates, beyond concerns over other structural factors weighing on inflation
First steps towards reopening
A first step towards re-opening to the world has been taken with the establishment of a travel bubble between Australia and New Zealand. Residents are now free to travel between both countries without mandatory quarantine. However, both will maintain sovereignty over any decisions regarding new mobility constraints. Within the framework, New Zealand is put on the same level as an Australian state, and each may take one-sided measures: for example, closing the borders to one state, or the entire country, as is already happening.
So what are the economic implications of this travel bubble? After analysing visitor and expenditure data, we can conclude it is mostly symbolic. Certainly, specific sectors or companies will benefit, such as the airline industry; but arguably Australia could capture more economic value by persuading domestic tourists to spend at home rather than abroad.
Looking at Figure 1, we observe that pre-Covid tourism from New Zealand represented the largest share of foreign visitors to Australia (15%), but they only rank fourth (around 5%)in terms of expenditures. As a result, the income this generates (as a % of GDP, Figure 2) is much smaller than income from domestic tourism. The picture is even less bright when we look at the net tourist income between Australia and NZ, which was -AUD 289m based on pre-pandemic (2019) circumstances.
Obviously, the present is different from the pre-pandemic situation. People from NZ can only travel to Australia, so this obviously benefits ‘Down Under’. In order to gauge the possible impact of tourist returns, we sketch a new scenario in which we raise the number of visitors from New Zealand (Figure 2). In our alternative scenario we assume 80% of departing NZ tourists will visit Australia in 2021, compared to 40% in the pre-pandemic (2019) world, since people are eager to travel after a year of isolation. Yet even in such a positive scenario, the additional income generated would be a drop in the ocean, generating approximately 0.3% of GDP. And this does not include the risk of even more Aussies than usual deciding they need a cross-Tasman trip.
Sword of Damocles
Australia’s ability to create the travel bubble is also a result of the successful containment of Covid-19 domestically. Another welcome result is the ensuing economic recovery. Q4 2020 saw a 3.1% q/q increase in GDP, bringing economic activity to only 1.1%below pre-corona levels. In Q1 2021 we expect the recovery to continue as most high frequency data points to further growth. Similarly to the USA, this economic recovery has led to higher inflation expectations in markets, pushing up the yield on 10yr government bonds to 1.74 at the beginning of April. The RBA again tried to temper these expectations at their last meeting, reiterating:
“The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth would need to be materially higher than it is currently. This would require significant gains in employment and a return to a tight labour market.“
The Board expects that these conditions will not be met until 2024 at the earliest.
However, the positive developments in employment data seem to suggest otherwise (Figure 3). The unemployment rate is now approaching the pre-pandemic level, while labour force participation and the underemployment rate are also showing the best figures in the last 5 years. So, are the RBA perhaps taking too pessimistic a view?
One aspect to bear in mind is that recent employment numbers are inflated due to the JobKeeper and JobMaker programs. JobKeeper supported employers up until 28 March, but the impact of its phase-out now hangs over the labour market like the Sword of Damocles. Estimates suggest around a million employees used this scheme in early 2021, and the Treasury expects about 150,000 workers will be laid off as it ends. Given the high uncertainties, we plot three ceteris paribus scenarios in Figure 4. In the most optimistic (-75,000), unemployment will rise to 6.2%, while in the most pessimistic scenario (-300,000), unemployment rises to 7.8%, which is higher than at any point in 2020. This partly explains what is JobKeeper-ing the RBA cautious, beyond concerns over structural factors weighing on inflation.
 JobMaker is a program to incentivize employers to hire additional employees between 16-35 years of age and runs from Oct. 2020 to Oct. 2021.