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.

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.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 628 with weekend update

Australian investors have been pouring money into US stocks this year, just as they start to underperform the rest of the world. Is this a sign of things to come? This looks at 50 years of data to see what happens next.

  • 11 September 2025
Exchange traded products

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement

We need a better scheme to help superannuation victims

The Compensation Scheme of Last Resort fails families hit by First Guardian and Shield losses, as well as advisers who are being wrongly blamed for the saga. It’s time for a fair, faster, universal super levy solution.

Investment strategies

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Economy

How bread vs rice moulded history

Does a country's staple crop decide elements of its destiny? The second order effects of being a wheat or rice growing country could explain big differences in culture, societal norms and economic development.

Investment strategies

Small caps are catching fire - for good reason

Small caps just crashed the party like John McClane did in the movie, Die Hard - August delivered explosive gains. With valuations at historic lows, long-term investors could be set for a sequel worth watching.

Defensive growth for an age of deglobalisation, debt and disorder

Today’s new world order appears likely to lead to a lower return, higher risk investment environment. But this asset class looks especially well placed to survive, thrive, and deliver attractive returns to investors.

Economy

Will we choose a four-day working week?

The allure of a four-day week reflects a yearning for more balance in our lives. Yet the reliability of studies touting a lift in productivity is questionable and society may not be ready for such a shift anyway.

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.