Australia is emerging from the pandemic sooner and at less economic cost than widely expected, but with higher unemployment and elevated debt. As the pandemic recedes, it is evident that global output and demand will recover slowly and unevenly. Major advanced economies have sharply increased government debt and their central banks have driven interest rates to rock bottom while buying big shares of additional government debt. At the same time, the US–China quarrel has become more intense, and Australia’s relationship with China has deteriorated. All these changed circumstances, much amplified and extended from their pre-pandemic appearances, limit Australia’s choices.

Key findings:

• Despite Victoria’s second wave of infection, Australia’s economic recovery from the coronavirus is underway. The bitter aftermath includes high and rising unemployment, vastly increased government debt, and a markedly less congenial global economy.
• Though formidable, the fiscal challenge is well within Australia’s means, especially if the Reserve Bank remains willing to acquire and hold Australian government debt. It may need to do so anyway to suppress an unwelcome appreciation of the Australian dollar in a world where major central banks are committed to low long term interest rates.
• Australia’s increasing integration into the East Asia economic community offsets the drag from the major advanced economies, but the US–China quarrel and the dislocation of global trading and investment relationships it threatens heightens the tension between Australia’s economic and security choices.