Novelist E. L. Doctorow compared writing with driving a car at night. “You never see further than your headlights,” he said, “but you can make the whole trip that way.”1 Doctorow’s metaphor is apt for leaders navigating an unprecedented global crisis, in which expectations regarding health, the economy, politics, and society are unsettled, and long-term predictions are speculative. If we stay alert to the paths and pitfalls just ahead, our limited vision might see us through.
For those who seek to comprehend the outlook for Australia amid the ongoing COVID-19 crisis, the scale and uncertainty of the macroeconomic indicators make for dramatic reading. In August 2020, the Reserve Bank of Australia (RBA) forecast its figures for the quarter ending in December 2020: an unemployment rate of about 10 percent, GDP contraction of around 6 percent, decline in household consumption of approximately 7 percent, and a 17 percent decline in business investment. And the RBA acknowledged extensive uncertainty on all four indicators.2
The shape and size of this shock are expected to change drastically as it evolves. Australia started its COVID-19 experience in March with a nationwide lockdown and a significant investment in cash-stimulus measures. States were expected to have relaxed restrictions by July while economic-stimulus measures would support the transition to a “new normal” by September. However, a breakout of cases in Victoria has provided a harsh reminder that progress toward reopening is fragile and will not be linear. While states are balancing the established plans with new requirements, according to current plans, the cash stimulus will be withdrawn across three phases from September 2020 to March 2021—though because of welfare pay cycles, payments will hit accounts a month later. Each phase of stimulus withdrawal will be a transition point for the economy, changing the distribution of the economic shock (Exhibit 1).
To understand the overall macroeconomic outlook and the impacts across specific industries, geographies, and cohorts, it is crucial to consider the relationship between the scale and timing of these economic shocks and the labour market. The unemployment rate rose to 7.4 percent in June 2020, a 21-year high. However, the effective unemployment rate3—which captures those employees working zero hours on JobKeeper, as well as temporary exits from the labour force—peaked in April at around 15 percent, and was close to 11 percent in June. We expect the unemployment rate and the effective unemployment rate to converge as the following events take place: as the JobKeeper wage-subsidy program ramps down, it will cause individuals currently working zero hours either to return to work or become unemployed; simultaneously, the reintroduction of mutual obligations will require JobSeeker recipients to reenter the labour force and start actively looking for work. In July 2020, the Treasury forecast unemployment to increase to around 8 percent in the September quarter 2020, and to rise again in the December quarter to above 9 percent. This convergence, however, will occur at different rates and to different extents across industries.
With so much changing, industry leaders and policy makers are asking the question: Where will specific industries, geographies, and cohorts stand in six to 12 months? Over this period, we believe that six forces in three categories will shape how different industries may respond. Our analysis reveals the set of forces that are now reshaping the economy and uncovers insights on Australian industries. Although our focus is on Australia, the same framework can also be applied elsewhere to compare microeconomic impacts across industries.
A short-term economic framework for a COVID-19 world
The economic challenges posed by COVID-19 stem from six forces, which vary according to how long they might operate and how amenable they are to policy intervention. These forces fall across three categories: COVID-19 restrictions, business-cycle effects, and structural changes (Exhibit 2).
Grouping these six forces across the three categories of COVID-19 restrictions, business-cycle effects, and structural changes can help decision makers gauge the duration of the shocks facing different industries and the scope for governments to intervene effectively:
- COVID-19 restrictions, such as rules affecting migration and tourism, are temporary and largely within government control. Where these factors are a large component of the economic shock, policy makers can focus on ways to support businesses creatively through the health crisis—for instance, by housing migrants in hotels during the migrants’ quarantine period.
- Business-cycle effects are also temporary, but the sheer size of this shock means the COVID-19 crisis could reverberate through the economy for a decade. Government intervention can play an important role in softening these recessionary dynamics. For industries like construction that are heavily exposed to these effects, policy makers can focus on helping industry rebound and stimulating new growth.
- Structural changes, by contrast, are likely to be permanent. Some of these shifts, such as the move online, may be triggered by COVID-19 restrictions. Other shifts, including the trend toward increased automation, could be triggered in addition by a trough in the business cycle. For industries subject to major structural shifts, such as retail, governments should consider ways they can help businesses stay competitive in this new normal, rather than protecting old operating models.
The most significant force of the economic shock in Australia so far has been the closure of international borders, which has caused international tourists, students, and some migrants to fly home, triggering a significant decline in the number of customers for exposed industries.
Another key force consists of the various industry constraints introduced as a consequence of the health crisis: physical-distancing rules, reduced capacity limits, and new operating rules, such as the requirement for nightclub patrons to stay seated. Such constraints play a critical role in limiting the spread of the virus, but they also act as a brake on the economy.
These first two forces have one important feature in common: they are linked to COVID-19 restrictions and may be in place until an effective vaccine or treatments are developed. Governments also have significant control over these constraints and can redesign and refine them as their effectiveness and costs become better understood.
The next biggest force of the economic shock expected in Australia is declining spending per person. The RBA’s forecast that wages will decline significantly underpins expectations that customers will reduce their total spending in response to declining wealth and confidence.
Internationally oriented businesses are also exposed to potential changes in the value of exports, due to factors including changes in global demand and prices and instability in international relations. Together, these domestic and international factors are putting pressure on business health, which is expected to result in decreased investment, more business failures, fewer new entrants, and less innovation.
These three forces—spending per person, value of exports, and business health—are all linked to business cycles. Like COVID-19 restrictions, they are expected to be temporary. However, business cycles are also prone to self-reinforcing dynamics: amid expectations that conditions will worsen, businesses may put off hiring and investing, and consumers may postpone purchases, causing the economy to decline further. Although business-cycle fluctuations are beyond government control, government intervention can play an important role in softening the shock and preventing recessionary dynamics from taking hold.
The final force at play is structural shifts. This consists of long-term changes to the economy—including increased automation, a reduction in labour-intensive methods, and a shift toward online sales—that have been accelerated by COVID-19. For example, many older shoppers used online sales channels for the first time while stay-at-home orders were in place, accelerating a shift away from brick-and-mortar retail. Unlike COVID-19 restrictions and business-cycle effects, structural changes are expected to be permanent. But policy can help industry and the workforce adjust to these changes by supporting the growth of new firms and reskilling workers who have been displaced by the changes.
The relative impact of the six forces arising from these categories differs across industries and economies. Exhibit 3 provides an application to Australia’s economy.
Conducting this bottom-up analysis at the industry level provides a sense check on the plausibility of macroeconomic forecasts. Even when the macroeconomic forecasts are sound, this bottom-up approach also yields details that can inform the actions of individual firms or the design of policies for an industry.
Understanding the variation across Australia’s industries
The actual impact of COVID-19 restrictions on employment across Australian industries from March to June 2020 has been highly unequal (Exhibit 4). Our forward-looking analysis of the impact across Australian industries until March 2021 reveals some striking features of industries on the COVID-19 front line (Exhibit 5). These industry-level estimates are based on an analysis of the forces detailed above and are aligned with the headline rate of unemployment and scenario assumptions forecast for December by the RBA in August. Although the policy and public-health scenarios that seem most likely for December continue to change rapidly, this methodology provides a tool for understanding the likely distribution of the job losses across industries and the relative contributions of COVID-19 restrictions, business-cycle effects, and structural shifts.
Some industries, such as tourism and education, will be hit hard by COVID-19 restrictions, but will be well-placed to recover once the threat passes. Others, such as construction, will be protected from these direct effects but will still be indirectly exposed to the crisis via business-cycle effects or structural changes. Some fortunate industries, such as technical services, are expected to start recovering once the immediate effects of the lockdown start to fade. And yet, within each of these industries, there are likely to be segments that are winners and losers.
The tourism industry is an example of an industry heavily exposed to the direct costs of COVID-19 restrictions. While national borders are closed, the tourism industry loses out on approximately $40 billion, the amount that international tourists typically bring into Australia annually. This loss will hit businesses such as hotels, tour companies, and souvenir stores hardest, but much of the impact will be more broadly distributed across the hospitality, entertainment, and retail industries. Tourist towns that are particularly hard hit may experience significant knock-on effects as local spending on nontourism services declines in tandem with local incomes.
One notable feature of the tourism industry in Australia is that the country is a net importer of tourism—Australians spend more overseas on international tourism than international tourists spend when visiting Australia. If Australians were to redirect their international spending of about $45 billion to domestic holidays, the industry could be buffered from the aforementioned loss.
However, Australians would need to take very different types of holidays in order to repurpose this spending because they typically spend less money on domestic holidays than on international travel, as well as less time—only one week, rather than three, on average. Australians also usually travel to different domestic locations than the destinations foreign tourists choose, so the additional holiday expenditure on domestic destinations will likely be a boon for some tourist towns but of little help to others (Exhibit 6).
Finally, while physical distancing remains a reality, it may be hard for the tourism industry to reach its pre-COVID-19 scale. In particular, arts venues might struggle to break even while seating capacity remains constrained, and visitor numbers are expected to be depressed across the hospitality industry—especially in pubs and clubs—for some time.
The tertiary education industry is similarly exposed to COVID-19 restrictions and the associated costs of keeping the national border closed, but the extent of the impact depends more on the segment of students or trainees served by an institution than on its location. Some of this shock has already set in: an estimated one-third of international students did not make it back to Australia in time to start Semester 1 in February.4 The impact of this shock is expected to become even more pronounced as the current cohort of international students graduates and potential new cohorts opt to delay their international studies or study in their home countries.
The impact on higher-education providers will depend on the duration of the courses they deliver. For providers of vocational or English-language training, the shock is expected to be sharp but shorter, as students typically enrol in programs lasting three to 12 months. The effects on universities will arrive later but last longer, as lost enrolments in three-year bachelor’s degrees this semester will lead to a diminished international cohort for the full duration of those programs.
The loss of international students in higher education may be partially offset by a gain in domestic students facing a tough employment market—but two factors make this an unlikely panacea. First, domestic demand depends heavily on the availability of government-subsidised places in university classrooms, so a commitment to increase funding would be required to bolster demand. Second, the profit margins earned on the high fees of international students are estimated to be more than five times those earned from domestic students.5 Universities would need to expand their student enrolments significantly to replace the operating profits previously used to cross-subsidise research.
Tertiary institutions could explore further opportunities to make up for reduced income. These include creating more-efficient teaching models, pursuing greater returns on research, and commercialising intellectual property through strengthened partnerships with industry and government.
The construction industry has been largely protected from the direct, immediate impacts of COVID-19. Construction projects have generally been able to proceed at pace by redesigning shifts and adjusting ways of working, and the long duration of many projects means that revenues did not drop off immediately when the crisis hit. However, the industry is exposed to business-cycle effects. As generous government stimulus policies are relaxed and the reality of a prolonged recovery sets in, construction is expected to weather a heavy business-cycle shock.
This shock comes at a challenging time for the sector. In October 2019—well before the crisis—the RBA forecast a 7 percent decline in construction over 2020.6 With households becoming much more reluctant to spend and demand for commercial real estate plummeting, this business-cycle downturn is expected to be more extreme than previously forecast.
The blow to construction will also have ramifications for other industries: half of the jobs affected by the cyclical downturn in residential construction are distributed across other industries, including manufacturing, distribution, business services, and retail.
The retail industry provides an example of how shocks can result in permanent structural changes. Consumer spending rebounded quickly after Australia’s initial lockdowns. This result was buoyed by above-average spending among recipients of government stimulus payments; this spending hid continued weakness in baseline spending. As stimulus payments decline, and second waves of COVID-19 transmission prompt the reinstatement of strict physical-distancing restrictions, spending per customer is again at risk (Exhibit 6). When a second wave of transmission and lockdown hit Victoria, for example, its consumer spending growth declined to become the lowest of any state in Australia.
Regardless of the pace of the recovery, the historic COVID-19 lockdowns have already accelerated the digitisation of retail. Stay-at-home rules and directives to minimise physical interactions have prompted many experiments in online retail—including novel initiatives and new product categories. As sales shift online, the employment profile of Australia’s retail industry is expected to change permanently, as fewer customer assistants will be required to deliver each dollar of revenue.
This is tough news for brick-and-mortar retailers, but it’s hard to prevent: the business fundamentals underpinning this structural shift mean that it is likely to be permanent. And attempts to prevent it could reduce the competitiveness of Australian retail over the longer term.
As with tourism, this shock will be unequally distributed across the industry. For example, consumers who have lost a little wealth may be much less willing to buy a car but as willing to buy affordable necessities, such as groceries, as they were before the crisis. This difference in wealth elasticity across product segments means that retailers of luxury and durable goods will likely be harder hit than drug stores, supermarkets, or budget retailers. Similarly, the impact on employment will be most pronounced in product categories experiencing the most accelerated shift to online, such as furnishings and appliances, and slower for items that customers still like to buy in person, such as fresh fruit and vegetables.
Implications for specific cohorts and geographies
One advantage of this bottom-up approach to estimating the short-term economic fallout is that it allows us to aggregate industry-specific insights into rich views of the overall shock. Our approach has been to determine economic prospects for an industry, building the picture as we include each force in turn. We have then used data on the geographic distribution of each industry and the demographics of its workforce, extrapolating our findings across geographies and employment cohorts.
In the scenario we modeled, areas of Australia that are highly dependent on tourism, retail, hospitality, and construction will be hardest hit, suggesting tough times to come for central business districts and tourist towns. Some coastal tourist towns could see unemployment rise above 10 percent in the period from September 2020 to March 2021.
And two-thirds of jobs at risk are located in major metropolitan cities; this statistic demonstrates both the high level of employment and the vulnerabilities of central business districts, which were already hit by policies such as work-from-home.
Our detailed industry analysis provides a rich geographic picture. For example, some tourist towns, such as the Barossa Valley and Kangaroo Island, are significantly insulated from the sharp decline in international tourists, as most of their visitors are domestic tourists. Others—such as North Queensland, Lasseter in the Northern Territory, and the capital cities—are especially exposed to international tourism demand and can expect to be hit hard.
Similarly, those Australian universities where almost half of the students were international will need to rapidly diversify their revenue streams or reduce costs. Others with established online offerings may have an opportunity to gain market share, as students seeking an Australian education increasingly look online. These industry dynamics will have a significant impact on the fortunes of local areas.
The same approach can be used to unpack the implications of the economic shock for particular cohorts of workers. For example, the tourist industry has a significant number of young, lower-income, and casual employees, so the decline of this industry will likely cause very substantial job loss among these groups; they are far more exposed than older, higher-income, and permanent workers.
Generation Z Australians, together with millennials, are the least confident of economic recovery, and they are not wrong to be concerned:7 across all industries, younger workers are expected to be hit the hardest, with 15- to 19-year-olds almost twice as likely to lose their jobs as 40- to 49-year-olds. Lower-income workers are expected to be twice as likely to be out of work than high-income earners. While casual workers make up around 20 percent of the total workforce, they constitute 40 percent of the workforce in the most vulnerable industries.
Considerations for policy makers seeking to stimulate recovery
Building a clear, detailed understanding of the circumstances facing an industry will allow policy makers to take a strategic and targeted approach to recovery.
At the industry level, policy makers can focus on correctly characterising the nature of each industry’s crisis and designing policy solutions that are fit for the challenge. For example, in the arts and recreation sector, redesigning COVID-19 restrictions to allow arts performances or sporting events to safely occur could be more effective than offering incentives for capex investment. Similarly, policy makers will need to be clear-eyed about the automation and digitisation shifts sweeping through industries and help firms adapt rather than protect unsustainable business models.
Within industries, there will be hot spots of gains and losses. Governments are now able to track new opportunities through granular heat maps of Australia’s labour market dynamics, monitoring changes in jobs by industry and occupation at the state, regional, and even postcode level (Exhibit 7).
Some cohorts may need particular assistance transitioning, especially where structural changes are at play. McKinsey research completed in 2019 indicates that a quarter to a half of Australia’s current jobs might be automated by 2030. Even jobs that are not fully automated will change; people will spend 60 percent more time working with technology. Governments could look both to the tertiary education sector and the broader private sector to support the challenge of reskilling employees. COVID-19 recovery policy provides a great opportunity to boost collaboration on this critical challenge.
Finally, it is important also to view the recovery opportunity through the lens of business size and age. In Australia, two-thirds of workers are employed by small and medium-size enterprises (SMEs). More importantly, SMEs have historically been the primary driver of growth. According to a 2015 report from the Department of Industry and Science, companies less than two years old created 1.44 million net new jobs from 2006 to 2011, while older companies produced a net 0.4 million decline in jobs.8 Only 3 percent of these young companies created 77 percent of the new jobs.9 Supporting these high-growth firms will be key to generating new high-quality jobs.
COVID-19 is a crisis and a threat, but it also presents opportunities to leaders who understand the short-term prospects of their industries.
Executives and policy makers can use the framework articulated here to help answer their key questions, including: To what trends are we exposed? Might these be temporary, or are they likely to last? Which regions and members of the workforce will be most strongly affected?
In a stable economic environment, leaders may be able to make long-term forecasts with confidence, grounding policies in far-sighted knowledge. But when the economic outlook leads the RBA to note in May that “The pace of recovery beyond the June quarter is especially uncertain,” it makes sense to set aside a quest for a reliable long-run prediction. Instead, we turn our attention to factors that are less sweeping in scope but more solidly dependable: the forces that will shape our industry, business, region, and workforce over the coming year.