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Wrapped up in our plans for the upcoming year 2020, little could we forebode the detrimental impact of the disease on us, as China went ahead to declare coronavirus as a national health emergency. However, soon enough, our positive outlook and optimism (or some might call it neglect) suddenly seemed to be simmering down as the infection assumed grotesque form touching plethora of people present across different geographical boundaries.
Overwhelmed by the accelerated pace of Covid-19, Australia tends to adopt a sceptic as well as a precautionary approach to battle the burgeoning health crisis. The Australian Government has taken heed to the varying medical emergency warning as it continues extending the travel bans on flights from China. Concerning foster economic developments amidst the deadly outbreak, a series of speculations have occurred that highlights that Reserve Bank of Australia in its next board meeting on Tuesday may cut rates.
In the year 2019, RBA reduced the cash rate thrice as the cuts took place in June, July and October, taking the final cash rate to be 0.75%. The rate cuts could be expected to reduce the inflation as CPI. Inflation in Australia in the past few years have decreased with CPI in December 2019 to be 1.8. The Australia Manufacturing Purchasing Managers Index (PMI), which is recording continuous fluctuations in its direction, rose slightly up as it was recorded to be 49.8 on 20 February 2020.
From speculative to Worsening Global situation
In the previous meeting, the situation regarding the spread of coronavirus was unclear, and uncertainty lied concerning if the disease could be controlled within China. However, in his recent speech, PM Morrison referred to coronavirus as a global epidemic which is impacting Australia across several sectors. The more serious perception considering the menacing pace at which the epidemic is spreading can play a significant role in rate cut decision by the RBA board.
The situation report by WHO, released on 1 March 2020 highlighted the addition of 1739 new cases that were reported globally in the past 24 hours, incorporating 579 cases in China while 1160 cases in the rest of the world. The statistics highlight 19.3 per cent growth in coronavirus patients across other countries in a single day as China encountered the rise by 0.73 per cent.
ASX on the dwindling path
While China suffers an excruciating economic loss, the rest of the countries due to their strong interrelated trade with China also are acknowledging the waning economic situation. The uncertainty created in the market owing to the continuously growing cases of Covid-19, the Australian stock market is witnessing its share of trouble.
S&P/ASX200 on the 7th consecutive trading session continued treading downwards, plummeting by 49.7 points on 2 March 2020. A majority of the sectors on 2 March 2020 were at the receiving end of the coronavirus uncertainty, as consumer discretionary, financial, healthcare, industrial, metal and mining, etc. sector indices fell on the opening trading day of March.
The investors shying away from the risky equity securities and shifting towards gold or other safer havens highlights their wavering trust. The quantitative easing following the rate cuts is expected to increase the money supply, thereby providing momentum to the dwindling stock market.
Fall in Aggregate Demand as a Compelling Force
The spike in the uncertainty is not only evident in the behaviour of the investors, but the consumers have aligned their actions similarly. Coronavirus outbreak seems to stimulate the conservatism on the existing debt-ridden Australian society as the people gears towards reduced spending.
The people abandoning their travel plans driven by the fear of coronavirus primarily affects the consumer spending in the travel and other sectors associated with the visitor’s economy.
The high housing prices, along with the consumer spending trends, especially among the millennials, have together skyrocketed the household debt-to-income ratio. Considering the data for the past one year, Australia appears to be lagging behind, concerning its employment-related endeavours have the unemployment rate has gone up from 5.0% in January 2019 to 5.3% in January 2020.
Strategists believe that the reduced consumer spending propelled by the personal financial conditions can be geared in the positive direction through further lowering of the interest rates.
The economic slowdown in Australia as Production in China standstill
Australia bears a strategic relation to China when it comes to trade. China is Australia’s largest importer of resources and products accounting for greater than 30% of its total exports in 2018, as the bilateral trade continues to expand between the countries. The government data highlights the export of varying products such as rural goods, non-rural goods, services along with travel-based income which flourishes the Australian economy.
Source: RBA
The production standstill in China is plaguing especially the Australian iron ore industry as the steel demands are at its record lows. Speculators believe that the rate cut might offer support to the dwindling Australian exports.
The strategists are predicting a rate cut in the forthcoming RBA board meeting to bolster the Australian economy that is reeling from the effect of Bushfire and Coronavirus. However, this may also drive investors with hot money to withdraw their investment in Australian currency, thereby affecting the Australian economy.
