Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 346

What is the likely effect of COVID-19 on the Australian economy?

In late January, we outlined two possible scenarios for economic effect on the Australian economy due to the spread of Coronavirus (2019-nCov) subsequently re-named COVID-19. The first was a situation similar to SARS, albeit with some key differences. Despite the lower fatality rate, it appears COVID-19 spreads more easily, or has got a greater hold before it was discovered. While both outbreaks occurred in China, the Chinese economy is far larger and more globally integrated now than it was in 2003. This is due to many years of high growth rates, meaning the absolute effect of even a small decline in China's economic growth will be far more significant to a greater number of countries – particularly Australia. With SARS, the virus was contained and effectively eradicated over a nine-month period.

In the second more frightening scenario, the virus is not contained and becomes a situation like the H1N1 swine flu pandemic, where the virus circulates freely round the world. Estimates by the WHO and other reputable sources for the 2009 – 2010 H1N1 pandemic, put infection rates at 11% to 21% of the global population. Between 284,000 and 579,000 people died from H1N1 which proved fatal for 0.034% of those infected based on these numbers. The frightening difference is that COVID-19 seems to have a fatality rate closer to 2%, meaning it is approximately 60 times as deadly.

Initial scenarios morph into a third

At this stage the situation is still uncertain, but some variation between the two scenarios is seemingly becoming a more likely third option. While technically the virus is either contained and eradicated or not contained and becomes widespread, the third scenario is the virus is contained for an extended period of time, sufficient for treatments and vaccines to be developed before it becomes ‘not contained’.

Our logic in contemplating this third scenario is that experience on the Diamond Princess cruise ship indicates how contagious the virus appears to be where one person can cause the spread of the virus to over 600 people in just over two weeks - and this is despite quarantine efforts. Also of concern is once testing was extended from those people who had symptoms to those that did not, it became clear there were significant numbers of people who were infected but had no symptoms. If these people are contagious and able to infect others, then stopping the spread of the virus within communities will be extremely difficult.

The second fact supporting this argument is the number of infections in South Korea, Iran and Italy and to a lesser extent Singapore, Japan and Hong Kong where cases are rising. In these countries the virus has essentially ‘escaped’ in that efforts to trace all the people infected from an initial carrier have likely failed and the virus is now circulating in the community. If new cases cannot be isolated quickly enough, then the virus cannot be eradicated and will either continue to circulate at low levels for a long period; or, if it is highly contagious then number of infections will rise rapidly and more extreme ‘Wuhan-type’ measures will be necessary. Countries with currently contained infections will likely begin to institute travel bans (similar to the ones in force currently for China) on anyone coming from these places to other countries.

Economic disruption

Economically, the impact of steps to contain the virus being isolation, quarantine and travel restrictions are likely to be extremely disruptive. The full effects of factory shutdowns in China have abated to date as inventories have been run-down to cover production disruptions at a customer level and built up to avoid production disruptions at a supplier level.

However, this is a temporary situation and it is only recently the flow-on effects of the shutdowns on business in Hubei province have really begun to affect other parts of what is a very large and complex supply chain. It currently appears as if the restrictions will need to stay in place for much longer than initially forecast by optimists because the COVID-19 virus is both deadly and contagious.

Further as we've seen with the recent spread of the virus to other countries, efforts to contain it are likely to cause economic disruption locally, which may be mild at first but may become more severe over time if the virus continues to spread. For example, it would be fair to say the Tokyo Olympics are under threat of cancellation at this point if the local situation in Japan worsens in the next five months.

We predict this will have a greater effect on Australia than other countries because of our very close links to China and the facts that:

  1. China is our largest trading partner due to resource exports,
  2. one in four of our international students are from China and
  3. one in six of our tourists are from China.

It is not unthinkable the impact on Australia will be enough to cause negative GDP growth within our economy in both the first and second quarters of this calendar year. Of course, this is the technical definition of a recession and in such a circumstance the RBA will almost certainly look to cut interest rates from their current levels and also probably introduce other emergency measures as well.

This recession if it occurs will likely be different from many others experienced previously in that different parts of the Australian economy will be disproportionately affected. The three areas above are obvious ones, but secondarily airlines and the travel industry in general are likely to suffer greatly as the obvious method for Australia to protect itself is to stop the free movement of people between itself and infected areas, and as these grow, the list of countries with travel bans is only likely to increase in the short to medium term.

 

Moray Vincent is executive director Amicus Advisory, an independent fixed income research firm that provides advisory services to conservative wholesale credit investors. Operating since 2008, it currently has around $1.8 billion of funds under advice.

 

RELATED ARTICLES

Six suspects in the murder of inflation

How a Chinese hard landing could play out

Are recessions a thing of the past?

banner

Most viewed in recent weeks

Why we’re not buying the market yet

The Australian market bounced back last Friday (13th) and Monday (16th) tempting analysts to call the bottom of the coronavirus scare. This is too early as the impact on companies is not yet evident.

How $200 billion is magically created

Australia is in a relatively good position to borrow $200 billion, with the RBA using printed money to buy bonds in the market. The long-term consequences are better than the alternative.

Howard Marks on 'Which way now?'

Howard Marks is the largest investor in the world in distressed securities. What does he think after checking the virus positives and negatives, and how much has he changed his mind in only a few days?

Drawdown reductions needed for retirees - UPDATED POLICY

During the GFC, in the face of rapid falls in super balances, the minimum drawdowns required for pensions were reduced by 50% to help preserve overall retirement savings. It's time for a repeat.

What are the possible economic effects of COVID-19 on the world economy?

In a widely-quoted scenario using estimated attack and fatality rates of coronavirus, about 0.07% of the population of the US dies. That's about 230,000 people, which the market is not ready for.

Note to Australia: be more French in the COVID-19 war

Andrew Baker is well-known as a superannuation consultant. Now working in the UK, he was caught in France with his family and is in lockdown. He worries Australian policy was too slow.

Latest Updates

Economy

Bill Gates: How to make up for lost time on COVID-19

Bill Gates warned the world in 2015 that we were not ready for the next inevitable pandemic, and we ignored him. The Washington Post has provided free access to his updated views.

Hamish Douglass on COVID-19: the three keys to the outlook

Hamish Douglass outlines three important issues in the outbreak of the coronavirus, and describes some consequences which may change businesses and consumers forever. We may never be the same.

Economy

How $200 billion is magically created

Australia is in a relatively good position to borrow $200 billion, with the RBA using printed money to buy bonds in the market. The long-term consequences are better than the alternative.

Investment strategies

Howard Marks on 'Which way now?'

Howard Marks is the largest investor in the world in distressed securities. What does he think after checking the virus positives and negatives, and how much has he changed his mind in only a few days?

Latest from Morningstar

Four stages of a typical bear market - but is this typical?

Bear markets caused by recession fears follow a pattern, but we have never seen anything like coronavirus. If financial stimulus and medicine prove ineffective, all bets are off. 

Economy

COVID-19 executes to a different playbook

The turning point in this crisis will be when the number of new COVID-19 cases starts to decrease. Until then, can we mitigate the damage to businesses and the economy so that we can snap back?

Investment strategies

Why technology stocks are good for the future

Over the long term, the technology sector has a vital role to make the essential transition to a more sustainable global economy and a cleaner planet. We highlight a few names with strong prospects.

SMSF strategies

Avoid complacency with your SMSF's investment strategy

Many trustees of SMSFs have become complacent about vague Investment Strategies, but fund auditors and regulators are paying far more attention. Ensuring your fund complies requires some simple changes.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.