Summary
In this briefing, Bethanie Finney – economist with SGS Economics and Planning – looks at what the latest data tells us about the potential short- and medium-term impacts of COVID-19 on local economies, amid global uncertainty
Briefing in full
COVID-19 and its associated restrictions – including temporary business shutdowns – have had a significant impact on the economy, with a reported decline in national gross domestic product (GDP) of 7 per cent in the June quarter (June 2020).
As restrictions lift across the country, it is still uncertain whether local economies will see a quick bounce back, or if we will see a deep and lasting recession due to further outbreaks, prolonged restrictions and broader economic effects. Further, beyond the initial shock, we are likely to see some lasting effects on local economies. It is also uncertain what will happen to businesses relying on government support (particularly, the JobKeeper subsidy) as that program is phased out and ends in March 2021. This will be explored in more detail in the second article in this series.
Short-term impacts
SGS research on the short-term impacts of COVID-19 found that GDP is not declining everywhere. Some regions with significant mining and agriculture industries (which have also been less impacted by social distancing restrictions) have experienced some levels of GDP growth. However, many local government areas seen declines in their local GDP of between 2.5 to 7.5 per cent. Areas that rely on tourism are likely to experience between 11 and 15 per cent decline in GDP as a direct result of travel restrictions. LGAs heavily impacted by the summer bushfires could see up to a 20 per cent decline in annual GDP as a consequence of these overlapping catastrophes.
Regions that are largely reliant on tourism, accommodation, and food services are expected to be hardest hit in the short term. Other sectors that have experienced short term shocks include construction, administrative & support services, and retail trade. Local economies that have a more diversified economy are expected to bounce back quicker than regions that are solely reliant on tourism or a single large employer.
Medium-term impacts
There have been ongoing impacts to small businesses in local economies as regions move out of restrictions and into a ‘COVID-normal’ environment.
The ABS weekly payroll jobs index shows the number of jobs in a particular region compared to March 2020 (see Figure 1 and Figure 2 below). This shows that when restrictions were first introduced at the end of March 2020, the number of jobs declined dramatically across Australian cities and regions.
The number of jobs began to recover with the easing of restrictions in June and July, particularly in Brisbane, Adelaide and Perth CBDs which were less affected by prolonged restrictions. However, jobs in Sydney and Melbourne CBD have not yet recovered to the same level and are still well below the Australian average.
Regional areas also saw a drop in jobs in April 2020, with a gradual recovery to September 2020 – excepting the Victorian regions due to the extended lockdowns. Although these tourism-focussed regions have recovered in line with the Australian average, they still remain below pre-COVID (i.e. March 2020) levels of employment.
There are risks for small businesses operating in this uncertain environment. Risks arise from a lower level of confidence and overall demand, lower spending on retail and services by both local residents and visitors, and higher levels of unemployment impacting disposable income.
Commercial tenancies may also be impacted if businesses no longer require shopfronts, offices or warehouses due to business closures, remote working, reduced staff numbers, or reduced output.
Figure 1: Weekly Payroll Jobs Index – capital cities Comparison | Source: ABS Weekly Payroll Jobs and Wages in Australia – Payroll jobs index by Statistical Area Level 4: index is compared to March 2020, for businesses that are single-touch payroll enabled.
Figure 2: Weekly Payroll Jobs Index – Regional areas Comparison | Source: ABS Weekly Payroll Jobs and Wages in Australia – Payroll jobs index by Statistical Area Level 4: index is compared to March 2020, for businesses that are single-touch payroll enabled.
International border controls
With the closure of international and state borders, the number of short-term visitor arrivals and returning resident arrivals to all states has dropped dramatically since April 2020 (see Figure 2). International visitor arrivals are not expected to recover in the medium-term, aside from potentially small numbers of visitors from New Zealand. This has significant impacts on the tourism sector, particularly the international tourism market.
These closures also affect net overseas migration, which has declined in 2019-20 and is forecast to be negative by the end of 2020-21. This anticipated decline reduces the working population of the country, particularly in cities that rely on a large, skilled workforce.
Additionally, international border closures prevent international students from entering the country. This is having a significant impact on the tertiary education sector, for which international students are a key revenue source. Other related sectors are also being impacted, including the student accommodation market and local retail businesses in areas that support large student populations.
Figure 2: Short-Term visitor arrivals by State – 2017 to 2020 | Source: ABS Overseas Arrivals and Departures, Australia – short term visitors arriving by State
Tourism impacts
Enterprises that are expected to be hardest hit in the medium term include: international and domestic airlines, performing arts venues, accommodation, gyms, and beauty services. Common across these businesses is a high degree of labour intensity (heavy reliance on workers and high cost of labour), and a high exposure to macro-economic drivers – such as international visitors, GDP growth, exchange rates, and disposable incomes.
These sectors largely rely on international tourism demand which is not expected to return until late-2021 or 2022. They also rely on large venues and shared spaces, which both present a high risk of transmission of COVID-19 and are therefore more likely to have restrictions in the medium to longer term.
Some of these impacts are expected to ease through 2021-22 as restrictions are progressively wound back in Australia, and domestic travel resumes. However, the impact on the international tourism sector is expected to continue for some time.
For local businesses that rely on international tourism markets, domestic tourism may not be enough to meet the shortfall in demand. Additionally, international tourism operators may not already be geared towards the domestic market, and may need to provide alternative service offerings to attract domestic visitors. This presents opportunities for new and improved tourism products and services, particularly in areas which rely heavily on tourism – however, this may not always be possible for some businesses, and further support may be required from local governments in supporting local business development.
Comment
This briefing provides councils with a look at the latest data on the economic impacts of COVID-19. It will be important for local government to continue to monitor these impacts as we move out of the immediate response phase and into a longer-term recovery phase.
This is the first in a two-part series looking at the economic impacts of COVID-19 on local economies. The second briefing will look at the likely impact on small businesses when the JobKeeper programme ends.
Related LGiU briefings include:
- Impact of the Covid-19 shutdown on vulnerable workers in Australia
- Emerging from the Pandemic: the City of Sydney’s Recovery Plan
- Strategic planning for the changing roles of activity centres post Covid-19
For more information on this briefing contact LGiU Australia by emailing mzierke@sgsep.com.au
