As gloom gathers across the economic landscape, China is actually starting to improve – and this may help put a floor under Australia.
In a new research paper on the effects of the crisis, superannuation research house Rice Warner observed “production in China is ramping up again, and the Chinese government will be stimulating their economy.”
“This will increase demand for Australian products, especially primary production like iron ore that has not been greatly affected to date.
“Supply chains should also recover quite quickly, and commercial construction will get back to normal.The immediate emphasis in China will be on domestic stimulus as exports will be stagnant for some time,” Rice Warner said.
That relatively positive slant on China’s economy is supported by this chart which shows coronavirus infections and deaths have taken a notable downward trend this month.
That is helping convince authorities to loosen social controls which have dampened the economy.
Rice Warner also saw some positives in non-mineral primary production regarding demand from China.
“Primary production is unlikely to be significantly impacted as the demand for produce won’t change,” the report said.
“Some sections, such as seafood, have suffered from the downturn closure of exports to China, but these should recover soon as China is slowly coming out of its shut-down – people are being allowed to move around more and businesses are re-opening.”
But for the rest of the world the outlook is far more negative with infection rates worsening and death rates outdoing China.
On Friday, news emerged that deaths from the virus in Italy had outstripped China and now totalled over 3400.The highly unusual nature of the current market slump was highlighted by news from the bond market.
Australian shares have declined 30 per cent since the market peak on February 21 while bond values in Australia were down 3 per cent and in global markets they were down 4.2 per cent.
Generally shares and bonds move in opposite directions as when share markets fall investors usually seek the safety of government bonds.
But Mano Mohankumar – a researcher with Chant West – said that had not happened in recent times “because investors seem to be rushing to the safety of cash.”
To date that movement to cash hasn’t damaged superannuation fund returns too badly as the diversification in super portfolios has offered members some protection.
Chant West researcher Mano Mohankumar said “the average growth fund [with between 60 per cent and 80 per cent exposure to market assets] fell 3.1 per cent in February.
“Since then, the virus has spread at an exponential rate and we estimate that the median growth fund is down a further 10.5 per cent over March to date.”
While that is a considerable dip, funds still have not given back their total returns of 14.5 per cent last year and Mr Mohankumar said the average 31 per cent exposure super funds held to unlisted and alternative assets as well as cash would act to protect members further.
During the GFC such assets held up much better than shares and listed property, protecting super members from the worst of the crisis.
While the news from China maybe encouraging, Rice Warner had other major concerns.
The American sleeper
“The big sleeper in the world economy is the US. Their apparent control of the virus has been due almost entirely to under-reporting,” the research house cautioned.
“Up to 9 March, the US had tested some 8,500 individuals out of a population of over 320 million while South Korea with a population of around 50 million had conducted 210,000 tests.”
“The US, in fact, has no idea of how severely their country is affected.”
In recent days the Australian government has committed $32.6 billion [1.6 per cent of GDP] to shore up the economy with the banking industry committing another $8 billion in support for small business on Friday.
The US congress has passed measures worth $US1 trillion [$A1.74 trillion] to crisis support which totals over over 4 per cent of GDP, according to the Australia Institute.
The package includes two rounds of direct payments to households averaging $1000 per adult American.
Across Europe France, Italy, the UK, Germany, Denmark, Spain and Sweden have implemented support programs totaling between 10 and 20 per cent of GDP
Stephen Anthony, chief economist with Industry Super Australia, said the government’s measures should should help “shore up the economy in the first and second quarters.”
And while some businesses make moves like Qantas’ decision to stand down 20,000 workers (two thirds of its workforce), “people are rushing to the shops to buy food and home office equipment and its hard to make a judgement on how things are going to turn out.”
Tim Harcourt, an economist at the UNSW business school, said the crisis would change the nature of industry with governments moving to help “retool the supply chain. We produce food but we no longer produce tin plate here and it could be the case we do something about that.”
“The changes we see will be more Ben Chifley than Paul Keating,” Mr Harcourt said.
The New Daily is owned by Industry Super Holdings