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

China’s new model is a plan for a hostile world

Global recession looms as debt balloons

Which country will be the next China?

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Latest Updates

Economy

The ‘priced out generation’ and what they should do about it

A fiery interview on housing exposed deep generational divides, sparking youth outrage and political backlash. As homeownership drifts out of reach, young Australians face a choice: fight the system - or redefine success.

Taxation

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

Superannuation

Meg on SMSFs: Ageing and its financial challenges

Ageing SMSF members can face issues funding their pension income as cash reserves dwindle. Potential solutions include involving adult children in contributions to secure future financial stability.

Economy

US earnings season was almost too good to be true

The second quarter US earnings season has wrapped up, with a record 82% of S&P 500 firms beating earnings estimates. As tailwinds fade, Q3 may reveal whether AI momentum can offset rising economic headwinds. 

Gold

Does gold still deserve a place in a diversified portfolio?

9,000 years and no devaluations later, gold is the world’s most enduring store of value. It remains attractive as the value of several paper currencies, including the US dollar, are threatened by deficits and rising debt.

Shares

Checking in on the equity market's silent engine

Consumer spending directly impacts corporate earnings, sector performance and market sentiment. The latest data from different economies uncover risks and pockets of opportunity for investors.

Fixed interest

6 key themes driving bond markets

The Fed could soon be prompted to join other central banks in cutting interest rates. This would have ripple effects across global fixed income markets and provide an especially attractive backdrop for emerging market bonds.

Sponsors

Alliances

© 2025 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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.