29 Jan 2021
In late 2020, ANZ Research forecast international borders would start opening from mid-2021, triggering a gradual pick up in arrivals of international tourists, students and migrants. But arrivals were not expected to fully return to pre-pandemic levels within the forecast horizon ending December 2022.
However, the vaccine rollout in Australia and overseas appears to be slower than expected and questions remain about whether quarantine-free travel will be possible - even for those who have been vaccinated.
"It is important to recognise that, in and of itself, closing the borders would be a large drag on the Australian economy in the long run.”
Australian Department of Health Secretary Brendan Murphy has warned “substantial border restrictions” will remain in place for at least the next year. This suggests the risks are leaning towards borders not reopening until late in the fourth quarter of this year or the first quarter of 2022.
A delayed border reopening will have implications for the external sector as well as actual and potential gross domestic product (GDP) growth.
Potential GDP would be lower
The delayed reopening of international borders will mean an extended period of negligible migration. In 2020’s June quarter, net overseas migration (NOM) was negative (departures exceeded arrivals) for the first time since 1993. The stock of temporary migrants continued to decline through to the fourth quarter.
NOM is a significant driver of Australia’s headline economic growth, accounting for 35 per cent of real GDP growth over the decade to 2018-19. In 2018-19, it accounted for almost half of real GDP growth.
This suggests an extension of restrictions on migration, by itself, would mean lower potential GDP and lower actual GDP growth in the second half of 2021, compared with what would have eventuated if borders had been reopened. This may become more apparent once GDP growth rates become less volatile. But this isolated impact has to be countered with the effects on the external sector, as well as the recent evidence the economic recovery has continued to exceed previous expectations.
Small net positive
The services sector is heavily exposed to border restrictions through tourism and education. As previously mentioned, ANZ Research had assumed borders would reopen in mid-2021, allowing a gradual pick-up in both tourists and international students. If the border reopening is pushed back later though, it would (perhaps counter-intuitively) probably mean a small net positive for the external sector in the short term, relative to what was previously forecast. This reflects the impact of Australians travelling domestically rather than overseas. There is a risk though the short term impact could be negative if education exports fall more quickly than expected due to more students finishing their degrees and returning home and/or fewer new students enrolling in courses in Australia.
It is important to recognise that, in and of itself, closing the borders would be a large drag on the Australian economy in the long run. This is because overall, Australia’s travel services balance is positive. In 2019, for example, it was $A14.1 billion in surplus. However, the situation that evolved under COVID-19 was Australia’s travel services balance surged rather than fell.
This increase was driven by the fact that the majority of international students were able to make it back to Australia before the borders closed in early 2020. If borders are to remain closed for longer, then the recovery in education exports is also likely to start at a later date.
ANZ Research had assumed education exports would only start to grow again once borders reopened. This would reflect both an increase in new enrolments but also the return of students who are currently enrolled but are learning online from their home country. The return of these students will lift exports, as their living expenses are counted as exports. This in itself is a big contributor to “education” exports.
In 2019, of the roughly $A40 billion of education exports, $A23 billion was from living costs while $A17 billion was from tuition fees. So a delay in borders reopening hurts our education services balance growth profile. Offsetting this negative impact would be the tourism expenditure balance.
Australians have for a long time spent more overseas than foreign tourists spend in Australia. In 2019, Australian tourists spent $A47 billion overseas, while foreign tourists spent $A23 billion here. This was evident in the sharp rise in the trade services balance in 2020.
So a delay in the border reopening is actually a net positive for the economy when thinking specifically about just tourism-related expenditure, as locals continue to holiday within Australia, rather than overseas (subject to internal border restrictions and lockdowns). ANZ Research’s view is that when borders reopen, the tourism effect will dominate the education effect, so basically the services balance will deteriorate. That means a delayed reopening is a positive relative to the previous forecast. However, the net positive of this is likely small against the broad uncertainty around the overall economic outlook.
There will, however, be regional and sectoral impacts from a delay in opening international borders. The education sector will obviously suffer. And there are considerable differences in the spending patterns of local and international tourists. For example, Australians tend to spend significantly more time and money in regional areas, while international tourists tend to stay mostly in capital cities. In 2018-19, almost 90 per cent of tourism expenditure in regional Australia was from domestic tourists.
ANZ spending data has already shown spending in tourism-related categories shifting towards the regions in east coast states. This trend could persist as long as international borders remain restricted and would be a boon for regional Australia, particularly those areas affected by the Black Summer bushfires of 2019-20.
It is important to recognise the relatively minor boost from a delay in reopening the border would be only short term. If the border reopening were delayed for materially longer, then the costs would start to outweigh any benefit as the stock of international students runs down - and likely wouldn’t be replaced as foreigners choose alternative destinations to study where they can do so in person.
Clearly, an extension of international border closures would have wide-ranging direct and indirect effects on Australia’s overall economy and growth. But there remains a wide band of uncertainty around economic forecasts at the moment, particularly given the enormous swings in the data driven by the pandemic and related restrictions.
Catherine Birch is Senior Economist and Hayden Dimes is Economist at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
29 Jan 2021
25 Feb 2020