Australia’s economy is about to meet its delayed day of reckoning

Australia’s economy is about to meet its delayed day of reckoning

Australia has gone over the coronavirus cliff, says Katharine Murphy in The Guardian. A surge in new cases has prodded the government into action, with Prime Minister Scott Morrison shutting down non-essential services such as cinemas and gyms this week.

The sudden stop to large swathes of the consumer economy has weighed on the stockmarket. The benchmark S&P/ASX 200 is down almost one-third over the past month. The Reserve Bank of Australia, the country’s central bank, has stepped in with emergency monetary support, slashing interest rates to a record low of 0.25% and launching open-ended quantitative easing. Canberra has already announced a A$17.6bn (£8.9bn) relief package, equivalent to about 1% of GDP, with more to follow.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The move to a stricter lockdown is already generating signs of economic distress, report Colin Packham and Kate Lamb for Reuters. Long queues have been forming outside the offices of the country’s main welfare agency. Westpac’s economists forecast that the “extraordinary measures” could see unemployment spike above 11%.

Record household debt

The “chief concern” now is that the closure of so many businesses could trigger a “wave of bankruptcies” and soaring unemployment, says Jamie Smyth for the Financial Times. Australia’s high consumer debt levels leave it particularly vulnerable. 

Advertisement – Article continues below

The country’s long housing boom has left many households with enormous monthly repayments, mainly in the form of mortgages. In a country where the household debt-to-income ratio is almost 200% – “one of the highest levels in the world” – many will struggle to keep their heads above water.

Higher headline unemployment figures will only capture part of the economic hit, says Jason Murphy on news.com.au. Underemployment is a long-running structural problem in Australia, with many workers reporting that they would like to work extra hours that are not available. The issue is especially acute in accommodation and catering, sectors that are likely to be the hardest hit by the Covid-19 shutdown.

Betting the house on China

It is thus little wonder that consumer confidence has plummeted to historic lows, says Shane Wright in The Sydney Morning Herald. 

The ANZ/Roy Morgan weekly measure of consumer sentiment is now 17% below the bottom reached during the global financial crisis. The gauge hasn’t been this low since the early 1990s, the last time the economy shrank.

Things are likely to get a lot uglier, says Malcolm Scott on Bloomberg. Goldman Sachs is now forecasting “the sharpest annual GDP contraction since the great depression”. The economy looks set to shrink by 6% this year, thanks largely to a collapse in “social” consumption at hotels, restaurants and cafes.

A close economic relationship with China was a key reason why Australia dodged the 2008 recession, but this time around that strength looks like another vulnerability, says Michael Heath on Bloomberg. The coronavirus crisis has “exposed the extraordinary depth of Australia’s economic dependence on China”. 

Advertisement – Article continues below

About one-third of the country’s exports go to the Middle Kingdom, making it the developed world’s most “China-reliant economy”. Chinese nationals account for 15% of tourists and 38% of foreign students. 

Australian miners of coal and iron ore have been feeling the pain from factory closures in the world’s second-biggest economy.

Covid-19 looks set to do what the dotcom bust, global financial crisis, house slump and raging wildfires all couldn’t: end Australia’s record streak of 28 years without a recession, says The Economist. 

From boom to bust

The only question now is how severe the downturn will be. Australia went into the 2008 crisis with strong employment and a central bank with room to cut rates, says Murphy. No such luck this time.

The “lucky country’s” long recession-free streak has obscured key problems in the Australian economy, above all unsustainable levels of household debt based on overpriced houses. 

Investors should also note that the ASX/S&P 200 is weighted towards financials and commodities, two sectors where particular caution is warranted. 

Advertisement – Article continues below

As the global economy plunges and Australian house prices return to earth, Australians may ruefully reflect that they didn’t really dodge the global post-2008 credit and housing reckoning after all. They merely dela

Leave a Reply

Your email address will not be published. Required fields are marked *