Treasury Warns On “Prolonged” Virus Driven Downturn – ShareCafe

Treasury Warns On "Prolonged" Virus Driven Downturn – ShareCafe

The Australian economy will shrink by at least 0.5% during the current March quarter due to the coronavirus outbreak with the figure likely to increase as the epidemic continues to spread.

This will be on top of weak exports, weak consumer spending and lower investment, as well as the impact of the bushfires in January.

Treasury secretary Steven Kennedy told Senate estimates on Thursday morning that the estimate is partial and only measures the effects on tourism, education and exchange rates but does not take into account other affected industries, such as exporters to China and other parts of Asia.

“We are looking beyond the March quarter and there are a range of possible scenarios … in our view it’s just too early to tell just what those economic impacts might be,” Dr. Kennedy told estimates.

The treasury estimate follows an estimate from the Reserve Bank’s Deputy Governor, Guy Debelle before the same Estimates Committee on Wednesday night.

He said the central bank expects the coronavirus impacts on education and tourism alone has already slashed Australia’s economic growth in the first two months of this year by as much as half a percentage point.

Dr. Debelle said the RBA had analysed student visas and airport arrivals and concluded that these services sectors, which make up about 5% of the economy, would take a 10% hit over the three months through the end of March.

The estimate is more than double the impact it expected on February 7 before the outbreak escalated.

Dr. Kennedy indicated the impact will likely be much broader and deeper.

He pointed out that China, where the outbreak started, is in “contractionary territory,” he said. China is Australia’s biggest trading partner.

The two start of month surveys of Chinese manufacturing activity showed falls so large that the Chinese economy was in recession in February and probably March.

“It will create more risk of a prolonged downturn and fiscal support will be needed to accelerate the recovery of the economy, especially once the health and health management effects of COVID-19 start to fade.

“A feature of the COVID-19 shock is that it impacts both supply and demand and has a particular time dimension,” Dr. Kennedy said.

Interestingly Australia’s January trade data showed little impact – the surplus only dipped to $5.21 billion, seasonally adjusted, from $5.38 billion in December but above the $4.8 billion level expected by the market.

This included a 7% fall in iron ore exports and a 4% decline in coal, two of Australia’s major exports.

Imports also fell 3% in the month which is why the surplus was better than expected. Imports at $34.9 billion was the lowest since July last year, a sign of the weakness in business investment and consumer demand.

But this is the calm before the storm – “We expect the effects of travel bans and Chinese factory shutdowns to be more pronounced in February,” JP Morgan economist Tom Kennedy said in a note and Westpac senior economist Andrew Hanlan said exports would likely make a “sizeable negative” for growth in the March quarter.

Leave a Reply

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