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- The rapid spread over COVID-19 in Australia over the past two months is unlikely to stop the RBA from lifting interest rates later this year, according to Commonwealth Bank (CBA)
- The big bank says with positive cases rapidly surging in Australia, it estimates around one million people are currently in isolation — either as a positive case or close contact
- This impacts both supply and demand as those staying home can’t spend money on services, and some people may be unable to work even though they’re employed
- However, the economic impacts are unlikely to last through to the second half of the year, CBA said, as the surge in cases brings with it the potential for herd immunity
- A the predicted second-half upswing means the Reserve Bank will be in a strong enough position to begin normalising the cash rate in November 2022, CBA predicts
The rapid spread over COVID-19 in Australia over the past two months is unlikely to stop the RBA from lifting interest rates later this year, according to Commonwealth Bank (CBA).
An Economic Insights report released by the bank on Tuesday predicts that though the spread of the Omicron variant will certainly impact the economy, this impact will be relatively short-lived.
Commonwealth Bank’s report tells a similar story to a Deloitte Access Economics Business Outlook report released earlier this week.
With eastern states that struggled through long and harsh lockdowns in 2021 now enforcing far lighter COVID restrictions, the economic impacts from the virus boil down to the personal isolation of COVID-positive cases and their close contacts.
With daily cases spiking significantly since late-2021, however, the amount of people impacted by isolation mandates because of a positive test is nothing to scoff at.
While CBA analysts admitted the actual number of people currently in isolation was extremely difficult to calculate, its broad-stroke estimate was at one million people.
This is based on a daily average of 65,000 COVID-19 cases and assuming each case has one close contact: with positive cases and close contacts required to isolate for seven days, it’s no surprise so many people might be staying home at once.
According to CBA, this has an immediate short-term negative impact on both the demand and supply side of the Australian economy.
On the demand side, these consumers can still buy goods online, but they can’t go out to consume goods or services.
This is further verified by CBA’s latest credit and debit card data, which suggests spending has dropped sharply on services since late last year.
“Our assessment at this stage based on our internal data is that the surge in COVID cases over the past three weeks has resulted in ~3% less spending over the period than would otherwise have been the case,” CBA’s report said.
“This is not a bad result considering the huge number of people that have been required to stay at home.”
On the supply side, the number of people in isolation means there are more people who are employed but cannot work.
“Forced isolation and illness means that many businesses are operating at either reduced capacity, shorter opening hours or may even be closed,” CBA said.
“The temporary weakness in spending, therefore, is reflecting both supply and demand factors.”
Yet, while the explosion of COVID-19 in Australia is certainly having negative short-term impacts on the country’s economy, CBA said it was unlikely to impact the second half of the year.
The silver lining of surging cases
The impact of COVID-19 infection on both a personal and economic level is dampened by a high vaccination rate across the nation, CBA said.
More than this, however, is the fact that such a rapid surge in cases now means the nation may hit herd immunity by the middle of the year.
In light of this, CBA has maintained its pre-Omicron prediction of GDP growth to hit 5.5 per cent by the final quarter of the year. The bank expects the unemployment rate to end the year at 4 per cent.
Further, the predicted second-half upswing means the Reserve Bank will be in a strong enough position to begin normalising the cash rate in November 2022, CBA predicted.
Commonwealth Bank said the RBA’s February meeting was an important one from a policy perspective, but any major decisions will likely be to curb short-term impacts of COVID cases rather than to introduce more long-term support.
On this note, CBA said it was expecting another round of policy support to be forthcoming but for this support to primarily target businesses in sectors most adversely impacted by the rise in COVID-19 cases.
Commonwealth Bank said it expected core inflation to track roughly between 2 and 3 per cent over the bulk of 2022, with wages growth to top 3 per cent before the end of the year.
These estimates, the bank said, were consistent with the RBA raising the cash rate in late-2022.
