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Australia’s economy faces headwinds in the new year as it continues to grapple with the impact of the coronavirus, but growth is set to pick up earlier and faster.

Growth momentum is already returning, and the economic outlook for 2021 looks more positive than it did a few months earlier, economists say.

“Australia has done a better job than just about any other nation in controlling the spread of the virus,” Commonwealth Bank chief economist Stephen Halmarick said.

“This, combined with fiscal and monetary policy support being provided to the economy, and the role played by the Australian banking system means the economic impact of COVID-19 has been less severe than in many other nations, and less severe than initially expected.”

That is being reflected in recent data with the economy expanding 3.3 per cent last quarter, record high building approvals, house prices returning to growth, consumer sentiment at a 10-year high, and a seven per cent surge in retail spending in November.

St George Bank senior economist Hans Kunnen says the current household savings ratio – 18 per cent – is well above what it has been in years and bodes well for the economy.

“It suggests there is a lot of cash out there. This money will now likely be spent in Australia because the borders are shut,” he said.

Treasurer Josh Frydenberg confirmed the speedy recovery when he upgraded economic forecasts while handing down the Mid-Year Economic and Fiscal Outlook.

The Treasury now expects Australia’s economy to grow by 0.75 per cent in 2020/21, rather than contracting by 1.5 per cent as previously feared. The unemployment rate is set to peak at 7.5 per cent, rather than 8.0 per cent, in the March quarter.

“The rebound has been very strong. We would generally expect (economic) growth in the next year to be around 3.7 per cent,” National Australia Bank chief economist Alan Oster said.

In December, Westpac also raised its economic growth forecast for 2021 to four per cent, from an earlier estimate of 2.8 per cent. It expects the unemployment rate to taper down to sic per cent by end-2021.

“We now expect that economic activity will return to end-2019 levels by the June quarter next year, rather than the December quarter,” Westpac chief economist Bill Evans said.

But economists also caution this momentum could easily reverse.

A key factor weighing on policymakers’ minds is the winding back of the federal government’s Jobkeeper wage subsidy and Jobseeker payments at the end of March.

“That will be a negative. But I do expect there will be some targeted aid towards those industries that are most affected,” Mr Kunnen said.

“I don’t think the government would want to jeopardise recovery by letting too many businesses fall through the cracks.”

A growing area of worry is the fraught diplomatic relationship between Australia and China and its impact on trade.

Agricultural exports have suffered the most damage, as China has restricted Australian coal, cotton, barley, beef, lobster, timber and wine in recent months. But iron ore exports, which account for 7.5% of our GDP, have so far been untouched.

A rising Australian dollar is also complicating efforts to gradually withdraw stimulus from the economy.

The Aussie has risen nearly nine per cent this year, to 76 US cents, boosted by strong macroeconomic data and rising demand for Australian minerals. Further gains could hit exports.

Westpac is forecasting the Australian dollar to rise to 80 US cents over the course of 2021.

The RBA may have to expand its $100 billion bond-buying program to ease pressure on the currency, analysts say, a move that may also help with its ‘national priority’ of reducing unemployment faster.

“Having entered the world of unconventional monetary policy, it is going to be a long time before the RBA can retreat from providing significant support to the economy,” Mr Halmarick said.