Is the Australian Success Story Fluttering?

Summary

• The Australian economy has endured through every global crisis after it last entered a recession in 1991.
• The impact of the pandemic on the Australian economy is likely to push the economy into another recession and shall be apparent in the coming months.
• The growing tensions between Australia and China and the Government’s stand on the investigation for the origin of COVID-19 might cost more to the Australian economy.

The Australian economy has witnessed a gradual lift in the restrictions after the Australian Government took control of the pandemic situation and was able to curb the spread of the virus effectively. The Australian economy has been significantly hit by the strict restrictions placed at the onset of the infectious disease in the country, especially the travel and tourism businesses. The slowdown in the domestic output of the country had led to the closure of several companies. However, the recent resumption of economic activities is keeping hopes alive for many businesses.

For example, a family-owned business providing award-winning experiences to over a million visitors annually, Scenic World had closed from 24 March 2020, following the introduction of social distancing measures introduced on 23 March 2020. The business is now planned to re-open from 26 June 2020 after surviving through a series of unfavourable events like the bushfires, flood, and the most recent coronavirus crisis.

Australia’s Economic Resilience Challenged by COVID-19

Australia is said to have enjoyed continuous and exceptional growth over the past few decades, something that other developed countries have rarely witnessed. However, economists across the globe now believe that the Australian economy might plunge into recession after three decades. So, is the success story of Australia’s unprecedented economic growth undergoing a turbulent time?

More importantly, what is likely to add a new wrinkle in the Australian economy is its relations with China that are going off-kilter. The Asian powerhouse has been a significant commodity export market for Australia over recent years, but recently, the ties between the two nations seem like taking the road downhill.

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Millions of people have lost their job in a short span of 2-3 months, and the Government anticipates that the loss in employment is expected to escalate over the coming months. Moreover, one of the key drivers of growth - international migration of skilled and temporary workers, and students - has been paused for several months now and the activity in housing investment is also expected to fall by nearly 9% in 2020.

What is more alarming is the speculation regarding a 10% shrink in the Australian economy during the second quarter of 2020, pushing the economy into a recession which is likely to become apparent in numbers by September 2020.

Entering the crisis in a better position as compared to other developed countries helped Australia to put forward a $200 billion economic stimulus to keep companies in business and the people employed. However, a lot of people are stuck with high-cost mortgages due to a considerably long price boom in the household market. Moreover, the rate of household debt to income stands at one of the highest levels among the developed countries. This also presents Australia with a major vulnerability as the country goes through one of the greatest crises in decades due to the pandemic.

Headwinds from China

Coming back to the Australia-China relations, China has been the largest trade partner for Australia and was the largest source of visitor arrivals to Australia from overseas during the year 2018-2019, with over 1.4 million visitors nationally.

Short-term visitor arrivals, Australia, year ending 2018-19 (Source:ABS)

Moreover, Australia’s trade with China has been a two-way process with imports from China rebounding in April 2020 after decreases were observed at the beginning of the year.

Australia’s diplomatic relations with China are taking a hit due to the call for an independent investigation into the source for the outbreak of COVID-19 by the country. This follows the stance of the US that has been accusing China of misinforming the WHO and the world about the outbreak of the disease.

As a response, China slapped Australian economy with a ban on import of beef along with penal tariffs on barley imports and has also accused Australia of taking collective action with the US in a political campaign against China.

As a matter of fact, Australia is considerably dependent on China for trade purposes. The island nation has drawn major benefits over the years from the strengthening of relations among the two countries, especially from the stimulus that had driven the growth of green shoots in the commodity prices.

Continued Uncertainty

The last time the Australian economy was in a recession was way back in 1991. The resilience shown since then has helped the robust economy to navigate through numerous worldwide downturns with high levels of immigration, which brings on average approximately one per cent of annual growth, sound economic policy and an export boom driven by China’s lift as a global economic force.

RBA had introduced two additional rate cuts in March 2020 and started buying Government bonds to tackle the financial turmoil and wild swings in the Australian currency caused by the pandemic. The measures by the RBA might have calmed the markets, but many problems like the high mortgage debt remain unsolved for workers with no jobs.

Moreover, Australian banks have welcomed the Government’s stimulus package and have offered support to the public by deferring payments on mortgages for six months under a scheme. The banks have suspended home as well as business loans worth $200 billion for six months. However, there is a limit to everything, and it would be interesting to see how long the banks can hold such deferrals in loans.

Also, reducing approvals for Chinese investment in Australia has growing concerns that could add heat to the diplomatic relations of the two countries. During the past year, investments from China in Australia have declined significantly, and China seems to place itself aggressively in the South China Sea.

Overall, it is the Australiana economy that is bound to feel the unwanted effect amid mounting pressure on the country from the US and rusting relations with China. As the word’s second-largest economy slapped Australia with import ban and punitive tariffs, China could likely take advantage of Australia’s vulnerability by targeting other significant trade sectors that are well-connected with China.

NOTE: All figures are reported in Australian Dollars unless stated otherwise.