Australia’s three-decade unbroken run of economic growth is in large part due to its success in tapping the rise of its largest trading partner, China.
But as the deadly coronavirus outbreak shuts down a swath of the Chinese economy, just as Australia suffers its own crisis in the form of the devastating wildfires emergency, economists are warning that the 28-year stretch is under threat.
“There is a very real risk that gross domestic product will contract as a result of the combined drag from the bushfires and coronavirus,” said Sarah Hunter, economist at BIS Oxford Economics. “Whether we go from this to a recession critically depends on how the outbreak unfolds.”
Australia’s economy was already showing signs of weakness before the wildfires took hold in the fourth quarter. Gross domestic product growth of 1.7 per cent in the year to September compared with 2.8 in the previous 12 months, thanks to weak consumer spending and the pre-virus slowdown in China.
Goldman Sachs has forecast that the fires which burnt millions of acres of land could knock 0.3 percentage points from Australia’s GDP growth in the half-year to March. With two-way trade between Australia and China worth A$215bn in 2018, the most-recent data available, the crisis caused by the virus adds to the downside risk.
Fresh lobster at the Sydney Fish Market. Exports of lobster to China have been hit as Chinese families cancelled new-year banquets and food markets were closed over safety fears © Getty
More than 900 Chinese people have died from the flu-like disease since the outbreak began in the city of Wuhan late last year. It has since spread to more than 20 countries, sparking international alarm and threatening to wreak havoc on the global supply chain.
Illustrating the strains, Australia’s benchmark S&P/ASX 200 is down 5 per cent this year and the Australian dollar remains close to near-decade lows of US$0.67 hit late last week.
The Reserve Bank of Australia last week kept interest rates on hold and warned people not to “catastrophise” the virus’s impact. But many investors believe the central bank will have to move soon to cut rates from the current record low of 0.75 per cent.
Economists also took aim at the central bank’s 2.75 per cent annual growth forecast as too optimistic, given that a figure of 1.7 per cent was reported in December before the virus took hold.
Since then, Canberra’s decision to bar entry to foreign nationals who had recently visited China has hit the education sector, which contributes A$37bn to the economy annually.
Half the roughly 200,000 Chinese students due to begin studies this month remain stranded at home, according to the International Education Association of Australia, which estimated a hit of up to A$8bn if they cannot attend the new term. A quarter of University of Sydney’s income comes from Chinese students.
There are also concerns of long-lasting reputational damage. “There is a risk international student numbers will drop and not recover after this crisis,” said Liam Donohoe, president of the University of Sydney Student Representative Council.
Other China-reliant sectors are also grappling with a sharp fall in demand due to the muted lunar new year celebrations.
Indian Ocean Rock Lobster, an Australian seafood exporter, usually ships five to 10 tonnes of lobster to China each day. But owner Michael Thompson said the “wheels started to fall off” late last month as Chinese families cancelled often-lavish new year banquets and food markets were closed over safety fears. “It’s having a domino-effect on everything to do with China. Tourism, lobster . . . prime lamb,” he said.
For the tourism industry, the Chinese travel ban has exacerbated a decline prompted by the wildfires. China is Australia’s largest tourism market, accounting for 1.5m short-term arrivals in the year to June — 15 per cent of the total.
Tourism bodies have estimated that cancellations due to the fires could cost up to A$4.5bn. Retail sales were down 0.5 per cent in December at the height of the wildfire emergency that is also expected to have reduced spending in the weeks that followed.
Another worry is whether the slowdown in China caused by the virus will curb demand for natural resources and lower prices of commodities such as iron ore and coal that are vital to Australia’s economy. Canberra had forecast that natural resources would generate a record A$281bn in export revenues in 2019-2020 but that is under threat.
If Chinese gas importers follow through on their threat to cancel up to 70 per cent of seaborne imports this month it would also throw that market into turmoil.
Australia’s government coffers are also feeling the effect of the economic malaise. The treasury warned this month that the uncertainty could undermine the government’s promise to return the budget to surplus in 2020 for the first time in a decade.
While it remains difficult to quantify the lasting impact of the virus, economists believe it will be larger than that of the Sars virus 17 years ago, which cut Australian GDP by only 0.1-0.2 percentage points.
“China is much more important now . . . than it was in 2003,” said Saul Eslake, an economist and fellow at University of Tasmania.
Shane Oliver, chief economist at AMP Capital, said there was a high risk that GDP growth in the first three months would be negative due to the double-whammy of the fires and the virus, which he forecast could reduce GDP by 0.5 percentage points in the quarter.
But Mr Eslake said the chance of two consecutive quarters of negative growth that would drag Australia into a technical recession was “relatively small”.
“I would say the 28-year run of growth without consecutive quarters of negative growth is likely to remain intact,” he said.
