Your browser does not support JavaScript! Pls enable JavaScript and try again.
05 Feb 2021

The great Australian recovery

By Simson Sanaphay, chief investment strategist for Citi Australia Could our economy really reach pre-COVID-19 growth levels by mid-year? We say yes

Australia’s economic recovery is expected to be driven by a 7.3 per cent boost in household spending this year as an embattled population loosens the purse strings and gets back to spending.

While the pandemic is still a persistent threat, it is giving way to a return to more normal living conditions, and job security and employment is improving as business conditions improve.

Underlying it all is an improving economy, which is being boosted by strong minerals exports driven by high commodity demand, and good growing conditions resulting in improved agricultural exports. This is despite ongoing difficulties in Australia’s relationship with its biggest trade partner, China.

We expect the trade surpluses Australia has achieved for the past three years to continue in the years ahead.

Those positives conditions have been aided by the extraordinary government and financial institution support through the pandemic, which allowed households finances to remain relatively healthy and stave off more difficult circumstances, like mortgage defaults and financial stress from lost employment.

As we entered 2021 about 90 per cent of the jobs lost to COVID-19 had been recovered, and unemployment is expected to further improve this year from 6.5 per cent currently to about 6 per cent by year end, according to official government data and our research.

Everything does not snap back to normal:

  • Wage growth remains low, and we expect that to continue as businesses seek to recoup losses made during the pandemic and protect balance sheets against any further disruptions.
  • Unemployment was about 5 per cent before we went into lockdowns, it is not expected to return to this level in the next the next few years.
  • Inflation to stimulate economic growth remains absent. We are relying on government and Reserve Bank of Australia (RBA) policies to create reflation – which is the measured release of inflation back into the economy through policy.
  • Businesses that relied on pandemic-induced support may not survive as conditions normalise and support is withdrawn.

Because of these impacts, we do not expect the RBA to change its loose monetary policy stance. We forecast the RBA to keep the cash rate target unchanged for the next two years, and note the RBA’s February guidance that it will not raise the cash rate until inflation is persistently within its target level of between 2-3 per cent. The RBA does not expect this condition to be met until at least 2024.

That said, the impact of the pandemic on Australia was not as great as in most other regions, like Europe and the Americas. It may create an effect where Australia’s growth appears to be lagging other parts of the world as they recover from the pandemic, but that is only because we are not starting from such a low base. So the higher shift in gear to growth is not expected to be as strong when vaccines are made available as compared to other countries severely impacted by the virus.

COVID-19 risks remain

Our forecasts can of course require adjusting if new variations of the COVID threat create new emergency conditions, but at this point we expect it would blunt growth forecasts, not derail the recovery. No doubt the inverse is true if COVID is effectively mitigated further spurred on by the imminent rollout of vaccines.

GDP set to return to pre-COVID levels in Q2 2021

A graph showing GDP and employment in Australia for period 2015 – 2022


Source: ABS and Citi Research as of January 2021

Vaccines and the path to immunity

Our economics team anticipates that Australia will achieve herd immunity by the end of this year. As of January, Australia has secured 115 million doses of various different vaccines, with the Federal Government managing a phased rollout through the general population, starting with priority groups liked aged and disability care and front line health workers.

We expect the rebound in growth that commenced in the second half of last year to continue and expand as sentiment across the economy improves on inoculation. Whilst this creates a catalyst for domestic growth, there is a high degree of uncertainty of when the Federal Government is willing to reopen international borders. Our best estimates are for the international borders to remain closed in 2021 with a reopening more likely in 2022.

Exports and the China factor

This would coincide with the broader rollout of vaccines in many developed economies. Specifically plans to bring back international students in 2021 remain uncertain and our education exports - which totalled $40 billion in 2019 - will continue to negatively impact net export data. However, overall exports are expected to rebound this year, driven by China’s strong appetite for iron ore to feed its heightened capital expenditure programs.

We believe that Australia and China trade relations are unlikely to derail growth. More recently, there has been a conciliatory tone between diplomats, which suggests that trade relations are unlikely to deteriorate further, and could see some improvements in 2021.

Thus, improved relations with China could be a source of upside sentiment.

Markets outlook

We are positive on the outlook for the ASX200, based on our top-down earnings per share (EPS) outlook and a market multiple of 19.5x, we expect the ASX200 to reach 7,000 by end-2021. Australia’s healthcare situation is well under control in comparison to other developed markets. We continue to see a domestic-led cyclical recovery and lower credit risks. Commodity prices are likely to remain higher for longer, particularly iron ore. Resource and bank stocks outperformed in in the last quarter of 2020, and we think the positive view for these stocks can extend further.


We refrained from calling a crash in the housing market at the start of the pandemic last year, owing to various demand support measures introduced by the government, along with highly accommodative monetary policy and loan deferrals for stressed mortgages. We had pencilled only a modest decline in prices in 2020, but housing demand trumped our expectations and growth moderated to 2 per cent through the year in December 2020. Since house prices have troughed, further improvements are likely in 2021. We have further upgraded our outlook and now look for house prices to finish +7.2 per cent higher by the year-end (upgraded from +2.8% previously).


Currency investors were preparing for the RBA to step back from its commitment to keeping interest rates on hold until 2024, in light of a 90 per cent recovery of the jobs lost in the Australian labour market and quicker return to growth, helped by China’s quick path to recovery and higher economic growth. This has resulted in the Australian dollar appreciating by over 25 per cent since the depths of the pandemic.

Enter the US

Clearly the RBA remains staunchly committed to its monetary stance, and has cemented its position by extending its quantitative easing bond buying program. This enables the Aussie economy every chance to hit full employment amidst a stable price environment.

The US is also getting into position for a strong spring back. Given how hard it’s economy and population was hit by the pandemic, the progression of a relatively smooth inoculation program could see the US economy perform strongly in the second half of the year.

Since it is starting from a lower base, we expect a steeper curve in the US growth path compared to Australia as its government and Federal Reserve continue to ramp up further stimulus measures and inoculation shifts towards herd immunity.

Call to action

The opportunity is present for investors to diversify into US denominated assets on AUD rallies. That said, we remain neutral on preference for US or Australian equities as both markets are positioned for growth. However, US cyclical sectors, such as financials may outperform given the stimulus agenda under discussion in the US and the Biden administrations prioritisation of recovery and growth.

Wealth Solutions


This information is not advice and has been prepared without taking account of the objectives, situations or needs of any particular individuals. Any individual should consider if the information is appropriate for your own situation. Individuals are advised to obtain independent legal, financial, foreign exchange and taxation advice prior to making financial decision. Past performance is not indicative of future performance. Citigroup Pty Limited ABN 88 004 325 080, AFSL and Australian credit licence 238098.

Related Content

Can the strong Australian dollar defy China's trade bans? It's not as bad as the news headlines suggest, unless iron ore comes under pressure
Post the pandemic there are unstoppable trends You can't predict the future, but you can make informed long term decisions on your investments
Term deposits vs bonds: a guide to fixed income investments For investors seeking capital preservation and a predictable income stream, term deposits have typically been the go-to fixed rate investment. But there is an alternative.