15 minute read 15 Mar. 2021
Skydivers mid jump

Team Australia is in a top spot, so why are ‘animal spirits’ for investment still missing?

By Mark Barnaba

EY Senior Fellow

15 minute read 15 Mar. 2021
Related topics Economics COVID-19

Australia’s economic, health and political institutions have come together like never before and executed a response to the current pandemic that is among the best in the world.

It means that while many challenges remain to be solved, relatively speaking Australia is in a great position to recover quickly and outperform global peers, not just in the short term but for years to come. While a number of studies have looked at comparisons between health outcomes and GDP, EY’s new Global COVID-19 Economic Index looks at GDP, employment as well as a key differentiator: combined balance sheet strength across household, government, central banks, non-financial corporates and financial institutions.

The resulting EY Global COVID-19 Economic Index of 25 countries, provides a more nuanced assessment of the success of a nation’s policies with respect to the economy. What we found is that Australia is in great shape, one of the top performers, when viewed against many comparable developed economies. Disappointingly this strong global position has failed to lower the risk premia for investment, meaning business remains more cautious than the data indicates it needs to be when it comes to committing to investment plans. Importantly, greater investment not only would broaden the base for recovery but provide a channel to build a more productive, future-ready Australia. 

Why balance sheets matter to the recovery

Academic literature points to the health of a country’s balance sheets as being an important determinant of sustained economic recovery. Recessions often lead to a worsening of an economy’s balance sheets as governments, businesses and households dip into their savings or take on more debt to support the economy or maintain their spending. Once the worst of the downturn is over these governments, businesses and households tend to shift to focus on repairing their balance sheets, which can hold back the economic recovery in the longer term. 

The economies with balance sheets in good shape prior the economic downturn can better respond to the crisis and can focus more on recovery rather than repair after the worst of the crisis is over. Each balance sheet within an economy is important.

Household balance sheets provide a solid indicator of how households are likely to respond to external economic crises and perhaps more importantly to stimulus measures, as the balance sheet underpins how wealthy households feel and impacts the decision to spend or build precautionary savings. This wealth effect that households feel, is the most well understood of the balance sheet concepts. For example, the Reserve Bank of Australia finds “When wealth increases, Australian households consume more. … The positive relationship between consumption and wealth is particularly robust for housing wealth and has been stable over time.” [1]

A similar psychology can be applied to non-financial businesses and small and medium sized firms. Businesses with strong balance sheets tend to feel more secure in taking risks, increasing debt and investing – all important activities for a growing economy.

Financial institutions, and their balance sheets, play a particularly important role as facilitators of the flow of credit through the economy. The Global Financial Crisis highlighted the importance of this. When financial institutions have strong balance sheets, they are more able to lend which can lift household spending and business investment but also, as we witnessed in 2020, to provide deferrals in a time of economic crisis. Loan and mortgage deferrals were an integral part of Team Australia’s building of a ‘bridge to the other side’. Rent deferrals similarly.

Viewed as a whole, private sector debt is an important overlay on the health of government balance sheets. As the IMF points out, private sector debt poses additional risk to highly indebted governments. “As public finances are further stretched during the pandemic, elevated private debt levels before the pandemic can leave governments with less room to manoeuvre in promoting a healthy and robust recovery.”[2]

In other words, government policy to stimulate household and business spending will be hampered if households and businesses feel the need to repair balance sheets rather than spend and invest.

The balance sheets of government – state and federal – as well as the central bank are also crucially important, and the cornerstone of a country’s ability to use fiscal and monetary firepower to respond to an economic crisis. Relatively low government debt not only provides ‘fiscal room’ to spend on stimulus but also underpins relatively low cost, easily absorbed debt profiles, and is integral to maintaining a favourable sovereign credit rating. For central banks, the balance sheet is a key factor in the size of the unconventional policy response. In Australia’s case, the Reserve Bank’s balance sheet was particularly strong opening the way for quantitative easing, yield curve control and the term funding facility.

Using publicly available data, the EY Global COVID-19 Economic Index has captured the current state of five balance sheets for each country*, as well as economic activity (using GDP and employment markers) and compared that with COVID-19 mortality rates per capita**. An EY Global COVID-19 Economic Index score of 100 indicates a country has had an average economic performance. Above or below 100 indicates outperformance or underperformance relative to the rest of the countries.

This analysis of relative performance though the COVID-19 crisis is intended to capture the fundamentals of an economy that will be needed for ongoing outperformance as economies recover.

What we found

Very few countries have been able to achieve both positive economic and health outcomes – indicating how difficult it is for countries to get the balance right. New Zealand, Australia, Denmark and South Korea have fared particularly well.

It is no coincidence the countries who have done well had fiscal space to support the economy with at least two sectors in a solid financial position prior to COVID-19; populations that have shown to be relatively compliant to regulation; and are often, geographically islands or peninsulas (meaning closed international borders are more effective).

Australia ranks third behind New Zealand and South Korea with the lowest number of deaths per capita and third behind New Zealand and Ireland on the EY Global COVID-19 Economic Index. Looking more closely at the economic factors, Australia ranks 11th out of 25 for government net debt to GDP, second for central bank assets to GDP (behind the Czech Republic), 13th for household net wealth, 19th for financial regulatory capital to risk-weighted assets, and fourth for the net wealth of non-financial corporates. Australia also ranked highly for GDP (4th) and employment (6th).

Our analysis shows that good health outcomes are not a guarantee of good economic outcomes, although it does increase the likelihood of that. Conversely poor health outcomes do correlate with a higher dispersal of economic outcomes, because it forces countries to rely more heavily on balance sheet supports to achieve positive outcomes. 

Hover over each country to see more details

*Due to data limitations, it has been assumed that New Zealand has the same financial and non-financial corporation health as Australia. Countries selected based on data availability only – as a consequence most are developed countries. Data as at 10th March 2021.

Sources: EY analysis of Oxford Economics, WHO, IMF & Macrobond data 

For example, Spain and Poland have achieved similar health outcomes but their economic positions have led to very different recovery prospects. Spain ranks lowest in our Index which is largely explained by the poor outcomes for GDP and employment, down 9.1 per cent and 3.1 per cent respectively on pre-COVID levels. But it also entered the crisis ranking among the worst performers on government balance sheets and central bank balance sheets and below average on household and corporate balance sheets, meaning it had little room to manoeuvre a better economic outcome. Poland on the other hand has seen above average GDP outcomes (-2.8 per cent), very strong employment outcomes (-0.3 per cent) and ranks relatively well across its’ balance sheets.

Other countries have a dispersion in balance sheet outcomes, which affects that country’s ranking. For example, Norway’s government balance sheet ranks first, because Norway has a very large sovereign wealth fund - due to its access to the North Sea Oil reserves - which outweighs its public debt. However, it’s central bank and household balance sheets rank last, meaning its’ recovery pathway may be constrained.

Interestingly Ireland has had relatively high deaths from COVID-19 but has outperformed South Korea and Germany, among others, in its economic outcomes. Ireland’s EY Global COVID-19 Economic Index was boosted by a strong GDP outcome which sits at odds to its employment outcome, which is amongst the poorest assessed, down 2.3 per cent since the pandemic started. Looking at the detail, the strength of GDP reflected a collapse in imports, which is a sign of a very weak domestic economy. This is a good example of how using GDP alone to assess economic performance through COVID-19 is too narrow. Ireland benefits from strong balance sheets for non-financial corporates and financial institutions but has very weak balance sheets for households and government. 

Key rankings

  • EY Global COVID-19 Economic Index

    Rank Country
    1 New Zealand
    2 Ireland
    3 Australia
    4 Denmark
    5 Netherlands
    6 Poland
    7 Switzerland
    8 Sweden
    9 Czech Republic
    10 Romania
    11 Norway
    12 Finland
    13 South Korea
    14 Germany
    15 Hungary
    16 Belgium
    17 Japan
    18 France
    19 Canada
    20 United States
    21 Austria
    22 Portugal
    23 United Kingdom
    24 Italy
    25 Spain
  • Deaths per 100,000

    Rank Country
    1 New Zealand
    2 South Korea
    3 Australia
    4 Japan
    5 Norway
    6 Finland
    7 Denmark
    8 Canada
    9 Germany
    10 Ireland
    11 Netherlands
    12 Austria
    13 Switzerland
    14 Romania
    15 Poland
    16 Sweden
    17 France
    18 Spain
    19 United States
    20 Portugal
    21 Hungary
    22 Italy
    23 United Kingdom
    24 Belgium
    25 Czech Republic

Where to next?

We expect it will be beneficial to update this framework as the virus and vaccine program evolves, countries stimulus programs change, countries re-enter lockdown and withdraw or instigate new policies which flow through to their balance sheets. For many countries, renewed waves of infection and associated lockdowns and restrictions, combined with weak balance sheets limiting the response, are expected to see their relative position deteriorate over the March quarter, as illustrated in Chart 2, below.

Australia, however, is not one of them. In fact, we expect over the March quarter to see Australia outperform all other countries in the scale of improvements - strong momentum, a broadening recovery, improving consumer confidence, easing health restrictions and continuing policy support should support this improvement. 

Expected movement in rankings across the March quarter

*Due to data limitations, it has been assumed that New Zealand has the same financial and non-financial corporation health as Australia. Countries selected based on data availability only – as a consequence most are developed countries. Data as at 10 March 2021.

Sources: EY analysis of Oxford Economics, WHO, IMF & Macrobond data 

The United States is also expected to make a large jump as a result of improving economic outcomes, the roll out of the vaccine and increased fiscal stimulus. Importantly, our framework will capture the worsening government fiscal position which will see the United States Government net debt exceed 100 per cent of GDP. Other notable improvers are expected to be New Zealand and South Korea – though to a lesser extent.

Some economies, in contrast, are expected to lose ground relative to the rest of the countries. Of note, is Japan which implemented a state of emergency across most urban areas for much of the March quarter – which constrained consumption at restaurants, bars and other businesses after 8pm. One of the key lessons of 2020 is understanding of how quickly and severely lockdowns hit economic activity. Japan will be keen to get on top of the health crisis ahead of the looming Tokyo Olympics.

Ireland, Switzerland and the United Kingdom are also expected to underperform reflecting stringent lockdowns put in place across the United Kingdom and much of Europe.

Australia is sitting at the top of the table and expected to stay there

Interestingly, the general feel coming in to 2020 was that Australia needed to be worried about both its household balance sheets, and its government balance sheets. The Federal Government was pushing strongly to return a budget surplus and markers were interpreted to suggest some level of pending economic stress, including as a result of relatively high household debt.

However, what we found was that comparably, we are in a much stronger position than we thought and both government and household balance sheets have been relatively resilient. As Chart 3 below highlights, while household debt in Australia is relatively high, household net wealth – which accounts for Australia’s high debt levels – is in line with our peers.

While Australia was worried about rising household debt levels, rising net wealth put household balance sheets in relatively good shape

Based on Australia’s EY Global COVID-19 Economic Index, Australia is likely to outperform every country in the ranking except New Zealand by the time March quarter 2021 data is published – placing us in an enviable position for ongoing economic recovery. Such a position at the top of the rankings should also limit economic scaring in Australia, relative to other economies and compared to our last recession in the 1990s.

The Vice-Chair of the United States Federal Reserve, Dr Richard Clarida [1]identified three critical components as being the differentiator for why economic scarring from COVID-19 wouldn’t be as bad as during the GFC: A fiscal response “scaled appropriately to the size of the shock… we did have the space [to respond because America is] a reserve currency country and we deployed it”; a strong monetary policy response; and “[America] went into this with a very well capitalised and very liquid banking system, which was not the case 15 years ago”.  

Similarly for Australia where healthy balance sheets underpinned fiscal support scaled appropriately to the size of the shock, an strong monetary response and well capitalised and liquid banks.

So why aren’t Australian businesses taking more risk?

Australia has not only seen an impressive health response, strong economic outcomes and the resilience that our balance sheets provide, but Australian businesses have access to cheap and easy credit and buoyant capital markets. Moreover, EY’s latest Capital Confidence Barometer[2] shows that Australian firms expect revenue and profitability will be back to pre-pandemic levels this year or next.

Despite all this, private business investment continues to disappoint; contracting by 5.1 per cent through 2020 despite policies to promote investment.

One factor explaining this lacklustre investment climate is that hurdle rates for investment in Australia remain high. Given hurdle rates are a combination of the weighted average cost of capital – which has clearly fallen, and risk appetite, what this tells us is that the risk premia remains elevated, and unnecessarily so given our analysis shows that Team Australia delivered and that Australia is well placed to continue to outperform as recovery continues.

That knowledge, especially as we continue down the vaccine rollout path, should be giving business the confidence to move into the future with certainty and pull the trigger on bolder investment decisions, which as Reserve Bank of Australia Governor Phil Lowe said, means invest, expand, innovate and hire.

Australia ticks the boxes for many of the preconditions for businesses to invest and hire, and for consumers to go out and spend. Consumers are doing their part, but improved investment appetite by corporate Australia would provide a broader base for recovery. Governments should see this as a great opportunity to innovate and legislate, an opportunity to push Australia’s current outperformance even further, to celebrate out-performance for years to come.


*Our composite methodology draws from publicly available data that provides the greatest scope for comparison across countries. Where countries are not included in the EY Global Covid-19 Economic Index is because there is insufficient data available to make a reasonable comparison. In regard to New Zealand, listed corporate balance sheet data is not publicly available. We have used Australia’s rankings as a proxy for New Zealand on the basis that Australian financial institutions and their subsidiaries are dominant in the financial sector, and a large proportion of listed non-financial companies are also foreign owned.

**The composite methodology comprises:

  • 50 per cent weighting for economic performance – with a 25 per cent weight to GDP and a 25 per cent weight to employment
  • 50 Per cent weighting across five balance sheets with 10 per cent allocated to each balance sheet. Included is Government Net Debt per cent  of annual nominal GDP; Central Banks assets per cent  of annual nominal GDP; Household balance Net wealth as a per cent  of annual nominal GDP; Financial sector regulatory capital to risk weighted assets; Non-Financial sector Net wealth as a per cent  of annual nominal GDP. 


Australia’s economic, health and political institutions have come together like never before and executed a response to the current pandemic that is among the best in the world. It means that while many challenges remain to be solved, relatively speaking Australia is in a great position to recover quickly and outperform global peers, not just in the short term but for years to come. 

About this article

By Mark Barnaba

EY Senior Fellow

Related topics Economics COVID-19