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The Coronavirus effect: Bad and getting worse for the Australian economy

·5-min read
The coronavirus has made a significant dent to the Australian economy. (Photo by Jenny Evans/Getty Images)
The coronavirus has made a significant dent to the Australian economy. (Photo by Jenny Evans/Getty Images)

The coronavirus will cut billions of dollars from the Australian economy.

How many billions?

No one can yet be sure.

This is because the virus is still spreading around the world, impacting a range of sectors, countries and businesses many of which are important to Australia.

But how long will the crisis with the coronavirus last? When will the travel bans and quarantining of cities and people end?

Only when these questions are answered will we have an idea of its impact.

In the meantime, there are a few uncomfortable facts about the risks to the Australian economy from the virus.

It is not good news.

Tourism accounts for 3 per cent of GDP – half as big again as the whole agricultural sector.

A 10 per cent drop in tourism would, over a full year, slice close to $6 billion off economic output. This is a loss of about $500 million a month. It has been reported that tourism-related businesses in Cairns and the Gold Coast are already gearing up for losses totalling $600 million.

And that is if things don’t get worse.

Already flights, hotels, restaurants, tourism services are suffering as visitor numbers decline.

Then there is the impact on foreign students, studying at Australian universities.

For the moment, the effect is moderate with many universities postponing the start date of the academic year. This is because an estimated 100,000 Chinese students have been unable to return to Australia ahead of the start of the year. If these travel bans are lifted in the near term, the hit to the economy will be moderate.

If, however, there are any further delays, the disruptions will have a material effect on the economy, not just to the university sector, but because foreign students will not be ‘in the economy’ spending money on rent, food, entertainment and the like.

Again, the effects are hundreds of millions of dollars.

In addition to these high profile effects, there are some indirect, but important effects, from what will be a sharp slowdown in the Chinese economy.

Prime Minister Scott Morrison said that the coronavirus and weakness in China could have “a real weight on the economy”.

He is right.

Over one-third of all Australian exports are purchased by China which means any sustained slowdown in the Chinese will further impact Australia is areas that at less obvious.

Within China, with cities being shut down, transport and other services severely constrained, there are estimates that Chinese GDP growth will slide to just 1 or 2 per cent in the March quarter which, for all intents and purposes, will be a recession for China.

Wuhan, which is at the centre of the coronavirus, accounts for 5 per cent of Chinese GDP – it is an important industrial city.

Manufacturing is shut. New construction projects are at a standstill. Restaurants are closed. Not only in Wuhan but in surrounding towns and cities and their businesses.

This means demand for many goods produced by Australia including commodities, food, wine, energy and the like will fall.

Oil prices have slumped. Iron ore prices are down. Companies are reporting a hit to exports to China of lobsters and wine, to name a few.

Businesses and individuals in China simply have no need for such items if they are stuck at home, unable to go to work or to socialise.

CANBERRA, AUSTRALIA - APRIL 02: Treasurer Josh Frydenberg speaks to journalists at the budget lock-up on April 2, 2019 in Canberra, Australia. The Morrison government’s first budget has delivered a surplus of $7.1bn, the first surplus in 12 years. Treasurer Josh Frydenberg has focused on tax cuts for middle income earners and 100 billion to be spent on infrastructure as well as increased spending on health, mental health, aged care and skills. (Photo by Tracey Nearmy/Getty Images)
CANBERRA, AUSTRALIA - APRIL 02: Treasurer Josh Frydenberg speaks to journalists at the budget lock-up on April 2, 2019 in Canberra, Australia. (Photo by Tracey Nearmy/Getty Images)

Disappearing act: The budget surplus

It also means the budget surplus strategy of Treasurer Josh Frydenberg is in tatters.

Even before the fires and coronavirus, there was evidence that the sluggish economy, with weak wages and chronically low inflation, would put the surplus in serious doubt.

Now with the loss of economic activity and need for government spending to tackle the aftermath of the fires and coronavirus, there is also a loss of tax revenue.

At the time of the mid-year budget update in mid-December, Mr Frydenberg was forecasting a budget surplus of $5 billion for 2019-20, already down $2 billion from his budget-time estimate.

This still seemed a decent buffer against bad news on the economy, but such is the size of the impact of the fires and virus that a deficit seems more likely than not.

If there is a fix to the coronavirus sooner rather than later, then the economic impact will be a short-term blip. Perhaps a few months of economic pain.

If the impact extends into March or April or beyond, the impact will be more severe and will require a more meaningful policy response not only from the government, but also the RBA.

No wonder the market is pricing in more interest rate cuts from the RBA, even though it has said it would prefer not to reduce rates.

Let’s hope the virus is ‘fixed’ sooner rather than later for many reasons, including the impact on the Australian economy.

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