Part 3 Modelling of economic recovery scenarios

Part 3 Modelling of economic recovery scenarios Ellie Yates Fri, 12/04/2020 - 17:43

3.1 The importance of scenario modelling 

  • Method used to examine the scenarios
  • Scenarios considered
  • Analysing the modelling results

3.2 Key findings from the central Economic Restoration scenario

  • The Economic Restoration scenario outlines a pathway of recovery for Australia
  • Impacts on occupational employment will flatten out over time
  • Many occupations will recover
  • Occupations that were performing well before COVID-19 are expected to grow
  • Structure of labour market unlikely to change significantly
  • Health, education and professional services will continue to dominate growth
  • The labour market will continue to shift towards higher skilled jobs

3.3 Insights from the other scenarios examined by the NSC

  • Initial impacts flatten out across all scenarios
  • More substantial structural change likely if digitisation accelerates
  • Trend towards higher skilled jobs to accelerate if digitisation accelerates
  • If recovery is impeded, construction may be adversely impacted
  • If international borders stay closed, local manufacturing may have to increase its capacity

3.4 Education and training implications

  • Completing an education remains key

3.1 The importance of scenario modelling

3.1 The importance of scenario modelling Ellie Yates Fri, 12/04/2020 - 17:43

As we have seen through the development of the resilient occupations framework, it is important to use analytical approaches that are suitable for making sense of labour market trends in times of rapid change and uncertainty.

Scenario modelling is a forward-looking way of examining labour market trends that can help improve our understanding of possible trajectories for recovery from COVID-19. While economic activity is recovering across Australia, this recovery is proceeding at an uneven pace. In uncertain times, scenario modelling can improve understanding of a range of plausible possibilities that may arise, including comparisons of the impact on labour market outcomes.

Method used to examine the scenarios

The NSC partnered with the Centre of Policy Studies (Victoria University) and AlphaBeta Advisors to conduct the scenario modelling using the Victorian University Employment Forecasting (VUEF) model. The VUEF is a family of models centred on a computable general equilibrium (CGE) model of the Australian economy. The VUEF captures dynamic adjustment to a shock and the flow onto employment, industry, occupation and educational attainment.

Scenarios considered

The NSC developed a central Economic Restoration scenario which is broadly consistent with the macro economic outlook in the 2020–21 Budget. From this scenario, the NSC then examined three variations to determine potential different recovery pathways that could emerge.

Figure 18 outlines the major assumptions for each scenario, which were drawn from combinations of health and economic related factors as the main drivers of uncertainty during COVID-19.

These four scenarios were modelled to identify the impact of COVID-19 across industries and occupations from 2020 to 2025 and the associated skilling implications.

A base case scenario, representing a set of assumptions on long-term trends that may have been expected to continue if COVID-19 had not occurred, is used as a comparative benchmark.

Analysing the modelling results

The NSC analysis draws on the modelling results in 4 ways:

  1. Net difference or the impact on employment over time relative to the pre COVID-19 level.
  2. No COVID-19 base or the impacts on employment at a point in time compared with what might have happened if COVID-19 had not occurred.
  3. Comparative differences between scenarios as a basis for identifying compositional impacts such as by industry, occupation, age, gender and skill level.
  4. Time impacts analysis considers different periods from Q1 2020 to Q1 2025, with 1–2 years considered to be short term and 3–5 years considered to be medium term.

Figure 18: Overview of scenarios based on health and economic-related drivers

Scenario Health impacts Economic impacts
Decorative image

Economic Restoration

Virus is contained and international borders start to re-open from 2021 With social distancing measures wound back and borders re-opening, domestic and international activity resume, similar to pre-COVID-19 levels and patterns
Variations to the central Economic Restoration scenario

Decorative image

Fortress Australia

Virus is supressed domestically not suppressed globally with international borders closed until 2022 With international borders closed, declines in tourism and international education are partly offset by increased local manufacturing and a smaller labour force due to lower net overseas migration

Decorative image

Impeded Recovery

Virus is contained and international borders start to re-open from 2021 Pandemic dampens household consumption and business investment, impeding the recovery.

Decorative image

Accelerated Digitisation

Virus is contained and international borders start to re-open from 2021 Increased rates of working from home and the adoption of digital technologies and processes leads to positive spill-overs

Source: NSC.

Further details on the assumptions and inputs to the 4 scenarios are provided in Appendix A.

3.2 Key findings from the central Economic Restoration scenario

3.2 Key findings from the central Economic Restoration scenario Ellie Yates Fri, 12/04/2020 - 17:50

The Economic Restoration scenario outlines a pathway of recovery for Australia

The Economic Restoration scenario is the central scenario examined by the NSC. This scenario is broadly consistent with the macro economic outlook in the 2020–21 Budget and forms the baseline from which all other scenarios are examined.

The Economic Restoration scenario assumes the virus is largely suppressed domestically by 2021 and that it is contained globally by 2022 due to the development of a vaccine or effective quarantine and treatments. This allows borders to re-open and triggers a recovery in travel, migration and global imports and exports. With social distancing measures wound back and borders re-opening, domestic and international activity resumes, similar to pre-COVID-19 levels and patterns.

While the Economic Restoration scenario provides a clear recovery pathway, the shock of COVID-19 is felt across the economy. The level of total employment also remains below where it otherwise would have been if COVID-19 had not occurred – even with the unemployment rate having returned to pre-COVID-19 levels – primarily due to border closures, causing migration and thus population growth to be lower than previously expected.

Importantly, the baseline that underpins the Economic Restoration scenario assumes that long-term trend changes in the structure of the economy continue to play out in the years ahead. This includes the shift towards services, particularly with employment in the Health Care and Social Assistance sector projected to increase strongly with the ageing of the population, as well as the response to the COVID-19 pandemic. The shift towards higher skilled jobs that has occurred in recent decades is also expected to continue. These two key trends dominate much of the expected future path for the Australian labour market and are not disrupted over the medium term by the shock of COVID-19.

Impacts on occupational employment will flatten out over time.

Although the impacts of COVID-19 are stark in the short-term, over time the impacts are likely to be more evenly distributed. This is demonstrated by Figure 19, which shows the change in employment relative to a no-COVID-19 baseline for each occupation examined by the NSC. This figure shows employment growth by occupation in the short term (to 2021Q2, as indicated by the light green bars) and long-term (to 2025Q1, as indicated by the dark blue bars) relative to employment growth in that occupation had COVID-19 not occurred.

This figure shows that although the difference between the worst and best performing occupations is initially large, by 2025 this disparity is less obvious. As expected, the impacts of COVID-19 are initially felt by occupations affected by public health measures including Hospitality, Accommodation and Transport professionals.

As noted above, the level of total employment also remains below where it otherwise would have been if COVID-19 had not occurred – even with the unemployment rate having returned to pre-COVID-19 levels – primarily due to border closures, causing lower migration and population growth and a smaller labour force than previously expected.

Many occupations will recover

While the figure above focuses on comparisons with the no-COVID-19 baseline, it is important to consider the overall net change in employment. While many occupations are severely impacted in the short-term, many of these occupations are expected to have a strong growth trajectory in the longer-term. This means they could see a strong recovery in the coming years.

Table 6 highlights a number of occupations which have been particularly impacted in the short term but are still expected to have more people employed in 2025 than prior to the onset of COVID-19. For example, although employment for Air Transport Professionals declined by 20.4% between February and May, it is important to remember that this occupation had been growing very strongly prior to COVID-19. As such, under the Economic Restoration scenario this occupation is still expected to grow by 4.8% over the period Q1 2020 to Q1 2025, demonstrating its longer-term resilience even if the near-term outcomes are weaker.

Table 6: Percentage change in employment by selected occupation, actual initial impact compared with projected growth under Economic Restoration scenario for period 2020Q1 to 2025Q1

Selected occupation Change in employment Feb 2020 to May 2020 Total projected employment growth 2020Q1 to 2025Q1 - Economic Restoration Scenario
Air and Marine Transport Professionals - 20.4 % + 4.8 %
Hospitality Workers - 56.8 % + 5.2 %
Accommodation and Hospitality Managers - 22.8 % + 3.2 %

Source: NSC analysis of scenarios produced in partnership with the Centre of Policy Studies and AlphaBeta Advisors. ABS Labour Force Survey, NSC seasonally adjusted data.

Occupations that were performing well before COVID-19 are expected to grow

Under the Economic Restoration scenario, existing trends in the labour market broadly continue. Figure 21 divides all examined occupations into three groups based on their performance in the five years prior to the onset of pandemic – the top, middle and bottom performing occupations. As demonstrated below, the top third of occupations prior to the onset of COVID-19 are expected to grow the strongest from 2021 to 2025 under the Economic Restoration scenario.

Structure of labour market unlikely to change significantly

Consistent with the impacts at the occupational level, the long-term industry composition of the labour market is not expected to substantially change. Once again, although the impacts of COVID-19 are stark in the short-term, over time the impacts are expected to be more evenly distributed across industries.

Health, education and professional services will continue to dominate growth

With the composition of the labour market not expected to significantly change, growth is likely to continue to be led by health, education and professional services related industries.

Employment growth is expected to be dominated by Health Care and Social Assistance (up by 205,900 or 11.6%), Education and Training (up by 85,100 or 7.9%) and Professional, Scientific and Technical Services (up by 65,800 or 5.7%) over the 5 years to 2025.

By contrast, employment is expected to be more subdued for Mining (down by 27,000 or 11.2%) and Construction (down by 25,000 or 2.1%, largely driven by lower population growth) as well as Manufacturing (down by 23,200 or 2.5%) and Agriculture, Forestry and Fishing (down by 16,400 or 4.9%).

Of course, this more subdued outlook does not necessarily translate into each occupation within those sectors. As this report has previously noted (see Parts 1 and 2), despite the falls in employment in the Construction industry over the three months to both May and August there are a number of occupations within Construction that rank highly on the resilience framework outlined in Part 2.

Additionally, policy measures could also have a significant impact on individual sectors and see actual outcomes diverge from the modelling results.

As noted above, the modelling sees the Mining sector experiencing the largest decline in employment over the medium-term. This result appears to be at odds with recent labour market data, which indicate the mining sector has been relatively strong despite the disruption to the global economy. This outcome is a function of the underlying assumptions of the modelling. The modelling draws on forecasts from the International Monetary Fund, which project a fall in world economic growth and in turn a dampening impact on export demand. Over time, this weakness can be expected to impact on the mining sector. Further, the relative strength of the Australian economy compared to other countries causes the exchange rate to appreciate in the model, making Australian mining outputs more expensive in foreign currency terms, further reducing demand and employment in the sector. In this context, the projected fall in Mining employment is not unexpected, however further interrogation of data in the coming months will enable us to assess whether this outcome is likely to emerge.

The labour market will continue to shift towards higher skilled jobs

Prior to the onset of COVID-19, the labour market had been continuing to shift towards higher skilled jobs. This was reflected in employment associated with Bachelor degree or higher level qualifications growing strongly prior to the onset of COVID-19 (up by 27.7% over the 10 years to November 2019), while employment for jobs requiring a Certificate I or secondary education had recorded relatively weak employment growth (up by just 6.4% over the 10 years to November 2019).

Looking ahead, this feature of the Australian labour market is expected to continue under the Economic Restoration scenario – consistent with both trends prior to the onset of COVID-19 as well as the no-COVID-19 baseline projections.

Reflecting the overall trend towards higher skilled jobs, the top occupations identified under the Economic Restoration scenario are heavily weighted towards occupations generally requiring high level qualifications. Even so, there will be a high number of opportunities for other jobs such as Personal Carers & Assistants and General Clerks because of the absolute size of these occupations and the projections for future growth.

Table 7: Top occupations by expected growth, from 2020Q1 to 2025Q1, Economic Restoration scenario

Position Occupation Expected growth 5 years to 2025Q1(%) Expected growth 5 years to 2025Q1(000s)
Largest percentage increase Medical Practitioners 16.8 19,100
Health Therapy Professionals 15.3 14,400
Social and Welfare Professionals 14.8 25,800
13.1 45,300
Information and Organisation Professionals 11.6 22,000
Largest increase in thousands Midwifery and Nursing Professionals 13.1 45,300
Personal Carers and Assistants 11.3 37,100
School Teachers 7.0 30,800
General Clerks 9.9 26,800
Social and Welfare Professionals 14.8 25,800

Source: NSC analysis of scenarios produced in partnership with the Centre of Policy Studies and AlphaBeta Advisors.

3.3 Insights from the other scenarios examined by the NSC

3.3 Insights from the other scenarios examined by the NSC Ellie Yates Fri, 12/04/2020 - 18:03

The 3 additional scenarios examined by the NSC enable consideration of alternative pathways for recovery, depending on the interplay of various health, economic and technological factors. These 3 scenarios are:

Decorative image Fortress Australia: Under this scenario, Australia manages to control the virus domestically through a combination of testing, tracing and isolation by 2021. However, globally the virus is not suppressed, which results in Australia keeping its international borders effectively closed until 2022. This has significant impacts on tourism (both international and domestic), international education and the imports and exports of Australia. There is also an increase in local manufacturing due to pressures on supply chains.
Decorative image Impeded recovery: This scenario, like the Economic Restoration scenario, assumes that the virus is largely suppressed domestically by 2021 and that it is contained globally by 2022. However, the COVID-19 shock impacts on business and consumer confidence, causing businesses and households to revise their investment and consumption plans, delaying recovery.
Decorative image Accelerated Digitisation: Again, similar to the Economic Restoration scenario, this scenario assumes that the virus is largely suppressed domestically by 2021. However, this scenario assumes that there are positive impacts associated with the adoption of digital technologies and processes, and increased working from home for professionals.

Initial impacts flatten out across all scenarios

Similar to the Economic Restoration scenario, although the impacts of COVID-19 are stark in the short-term, over time the impacts are expected to be more evenly distributed under the other scenarios examined by the NSC. This reflects how severe the initial impacts of COVID-19 have been on the labour market.

More substantial structural change likely if digitisation accelerates

Under the Accelerated Digitisation scenario, there are positive impacts associated with the adoption of digital technologies and processes, and increased working from home for professionals. These trends lead to a number of changes in the structure of the labour market, brought about primarily by changes in how businesses operate, and the way services are delivered. This change is the most significant exhibited in all the scenarios examined by the NSC.

The scenario assumed that some of the behavioural changes that have been adopted during the pandemic will continue, including:

  • increased use of digital technologies and IT services
  • increased use of online shopping
  • increased demand for delivery services, driving growth in transport and logistics
  • lower office space requirements, due to more people working from home or remotely.

As demonstrated in Figure 25, employment in Professional Services is forecast to increase under the Accelerated Digitisation scenario due to a shift towards digital services compared to the Economic Restoration scenario. With a stronger shift to online retail and a subsequent increase in warehousing and postal requirements, Retail Trade employment is forecast to fall while employment in the Transport, Postal and Warehousing industry rises. There are also some residual benefits for Manufacturing.

Trend towards higher skilled jobs to accelerate if digitisation accelerates

Under the Accelerated Digitisation scenario, there are also impacts at an occupational level – particularly evidenced by an increase in the share of employment in higher skilled technology-based occupations. As shown in Figure 26, the number of people employed in occupations that involve technology, computing and media professionals is expected to grow in both the short-term and medium-term.

This employment growth would be offset by a fall in employment in lower skilled occupations (such as Freight Handlers and Shelf Fillers). This reflects the increased automation of routine tasks, and the shift to online retailing and warehousing. For displaced workers, skills and training development will play a crucial role in up-skilling and re-skilling workers to assist them in transitioning into the jobs that are growing.

If recovery is impeded, construction may be adversely impacted

Under the Impeded Recovery scenario, the economic downturn is prolonged and recovery delayed. This negatively impacts employment in many construction related occupations in the scenario. Male employment is also more heavily impacted, as men make up a greater proportion of employment in trade-based occupations that are common in construction.

If international borders stay closed, local manufacturing may have to increase its capacity

Under the Fortress Australia scenario, Australia manages to control the virus domestically through a combination of testing, tracing and isolation by 2021. However, globally the virus is not suppressed, resulting in Australia keeping its borders closed until 2022.

Figure 27, shows that under the Fortress Australia scenario, manufacturing performs much better. This is because pressures on supply chains divert resources into locally manufactured goods.

3.4 Education and training implications

3.4 Education and training implications Ellie Yates Fri, 12/04/2020 - 18:08

Completing an education remains key

The Australian labour market has been progressively shifting towards higher skilled employment over recent decades. This trend seems likely to continue and is reflected across all the scenarios examined by the NSC. This result is consistent with pre-COVID-19 trends and emphasises the importance of post-school qualifications.

VET provides opportunities for those who are displaced in the short or medium term

The VET sector will be instrumental in supporting the recovery from COVID–19. VET offers an opportunity to gain both the theoretical knowledge and practical skills that are valued by employers. A VET qualification can provide the pathway for displaced workers, or those at risk of being displaced, to either move into higher skilled roles in the same industry or transition to new jobs in sectors with stronger growth potential. There are some VET related occupations that are expected to be more resilient than others, with relatively strong projected growth over both the short and medium term. This is consistent with longer term trends, including personal carers, health and welfare support workers, child carers and education aides.

Others are projected to perform poorly in the short term but are expected to bounce back over time. For example, hospitality workers, food trades workers and ICT telecommunications technicians. These provide potential opportunities for short term reskilling especially for those looking to retrain in a new occupation or upskill in their existing occupation through qualifications lasting 6–18 months.