Impact Report for Australia

ECON1020
Impact Report
COVER SHEET
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1. (A). Microeconomic Effects of Covid-19 in Australia
The COVID-19 pandemic prompted significant microeconomic transformations in Australia between 2020 and 2022. The initial virus outbreak in early 2020 affected consumer behavior, industry dynamics, and labor markets.
On consumer behavior, the pandemic induced a considerable shift in spending patterns. Th household consumption expenditure dropped by 2.7% in 2020 (ABS, 2021). This drop marked a significant reduction in consumer spending. The tourism and hospitality sectors were among the hardest hit by this contraction since international and domestic travel was almost entirely halted. In the financial year 2018-2019, Australia welcomed 9.3 million visitors (Kuang, 2022). This number plummeted to zero between March 2020 and March 2021, when the country was under lockdown due to the pandemic (Kuang, 2022). This led to a significant decline in employment in these sectors, with some businesses closing permanently. Around 35% of small businesses in these sectors ceased trading during the peak of lockdowns (ASIC, 2022). The manufacturing and construction sectors were also affected, with production falling by 4.5% and 2.3% in 2020 (ABS, 2021). In contrast, the mining sector remained relatively resilient, with only a 1.5% decline in output (ABS, 2021).
The unemployment rate in Australia increased sharply in 2020. The Australian Bureau of Statistics recorded a sharp rise in the unemployment rate to over 7.5% in mid 2020 (Figure 1) (ABS, 2021). This figure declined to 6.6% in November 2020 but rose again to 6.8% in December 2021. In addition, the underemployment rate (those employed but wanting more hours) remained high at 8.5% in December 2021, reflecting reduced labor demand in specific sectors (ABS, 2021).
Figure 1: Bar graph representing unemployment trends in Australia
Sources: CEICDATA.COM| Australia Bureau of Statistics
In response to the effects of the Covid-19 pandemic, the Reserve Bank of Australia (RBA) adopted a series of monetary policies to stabilize the Australian economy. Some of the measures adopted by RBA include cutting interest rates to a record low of 0.1% and launching a quantitative easing program worth AUD 100 billion (RBA, 2021). These measures helped maintain low borrowing costs, but inflation remained below the desired range of 2-3%, recording 0.9% in 2020 and 1.6% in 2021 (RBA, 2021). The Australian economy is slowly recovering. For example, the inflation rate remains low. The signs of recovery indicate that the RBA's monetary policy measures have played an instrumental role in supporting the economy. Despite these early signs of improvement, the recovery remains uncertain.
(B). Monetary Policies adopted by Australia
In managing the economic shocks from the COVID-19 pandemic between 2020 and 2022, the RBA initiated several pivotal monetary policy actions. The cash rate is the primary tool used by RBA for influencing the broader economy. This tool affects borrowing costs and, consequently, consumer and business behaviors. In March 2020, when the global economy started to feel the significant impact of the pandemic, the RBA decisively cut the cash rate to a historic low of 0.25% (RBA, 2020). This rate was further reduced to 0.1% by November 2020 and maintained at this level throughout 2021 (RBA, 2021). These rate cuts aimed to stimulate economic activity by making borrowing more accessible and incentivizing consumer and business spending.
In addition to rate cuts, the RBA embarked on a quantitative easing (QE) program in March 2020. This was the first time such a measure was implemented in Australia. The QE program involved the RBA purchasing government bonds in the open market, aiming to lower bond yields and encourage borrowing and spending. The RBA's total purchases reached AUD 100 billion by November 2020 (RBA, 2020). This approach aimed to inject liquidity into the economy and stimulate economic activity.
As demonstrated in the Figure 2 below, the monetary policies by the Australian government affected only market demand. After the monetary interventions, the aggregate demand curve (AD1) shifted to the right AD2. This shift is also marked by movement of Equilibrium demand from E1 to E2 as shown in Figure 2. This indicates the increased demand at each price level. The AS curve remains the same since the monetary policies only addresses the demand-side interventions.
Figure 2: AD-AS model representing implications of monetary policies
The RBA implemented additional stabilising measures to fortify the economy during this tumultuous period further. These included providing liquidity to the financial system, supporting the functioning of financial markets, and offering funding to businesses and household...