Impact of Coronavirus on Australian Economy and Way Forward

Summary

  • A start of the new pandemic that originated in Wuhan, China created a global health challenge and an economic catastrophe.
  • Just after the most horrific bushfire season ended, Australians needed to adapt to a “new normal”.
  • Because of the Australian reliance on China, the Australian dollar had drastically decreased in value.
  • Economists Jeremy Thorpe and James Loughridge carried a research about possible coronavirus impacts on Australia.
  • The way forward is yet to be decided by the world’s leaders.

The beginning of 2020 was something that no one could have imagined happening in this day and age – the start of a new pandemic, caused by COVID-19. What originated in Wuhan, Hubei Province in China, suddenly affected every aspect of humanity, faster than any scientist could have predicted.

Apart from affecting human health and putting several age groups and social groups at risk, COVID-19 has brought (and is still bringing) many costs to the global economy. What was first thought to be a little misfortune turned out to be the worst economic and health crisis since The Great Depression, which also occurred after the Spanish Flu pandemic at the beginning of the 20th century.

First impact in Australia

Soon after Australians realised the effect that the Black Summer [2019 bushfire season] had brought to their already damaged economy, the Australian society needed to adapt to social distancing measures, strict movement restrictions and the biggest unemployment increase the country has ever seen. After avoiding the Global Financial Crisis (known as GFC) in the 2007-2008 period, as well as the Asian financial crisis in 1997, Australia did not get so lucky with dodging consequences of the novel coronavirus pandemic. In just one week, a record of one million Australians lost their jobs due to different lockdown stages on the continent. Scott Morrison’s centre-right Liberal party introduced the greatest stimulus package (A$130 billion) in order to help around half of the Australian workforce. About 10% of the nation’s GDP (A$200 billion) has been given to businesses in need, which has never happened before in Australian history.

RELATED: Second Page of the COVID-19 Diary: Business Insolvencies, Unemployment, Underemployment

Great connection between Australia and China

Due to the virus outbreak that started in China, domestic businesses in Australia felt the pandemic through student and non-student tourism, which rely on people travelling between the two countries. International supply chains (e.g. Kmart) that manufacture and import their products from China were also affected in business, as inventories in those shops began to run low.

ALSO READ: Anticipated drop in international students likely to hit Australian universities

Experts thought that the Chinese government would make investments in infrastructure, which would cause an increase in commodity prices. However, the prices would eventually decrease because of the slowdown of the Chinese economy.

When coronavirus cases in China started to rise, their economy had slowed drastically. What was inevitable from happening in response to the pandemic was the decreased value of the Australian Dollar (AUD) compared to the United States Dollar, which was so low that the depreciated value level has not been seen since the GFC.

Economic modelling

It is important to stress that every predicted long-term coronavirus impact is assumed, and not known or final. The approach taken for the SARS outbreak in the early 2000s is similar to the one chosen for the COVID-19 outbreak, employed by Commonwealth Treasury. The following economic model has been established by predicaments that are known at this moment, but new evidence could emerge at any point in the near future.

Experts Jeremy Thorpe and James Loughridge used the Global Trade Analysis (GTAP) model to assume coronavirus impacts on the Australian society. Notably, they developed assumptions that cover the next 12 months, starting from March 2020.

Thorpe and Loughridge believe that general labour input will be reduced due to more people catching coronavirus and not being able to work. Due to an estimated 50% of the population likely to get coronavirus, it is believed that there should be a 1.525% reduction in the global work supply, according to the carried research.

The working population will be permanently impacted on a yet unknown level, but it is expected that coronavirus-triggered deaths within the younger population will be low, also resulting in a global labour reduction, the economists said.

As mentioned earlier, many supply chains in Australia have been affected due to the connectivity with China. Hence, capital productivity is believed to reduce by -0.57% (1/3 labour reduction), according to Thorpe and Loughridge.

Among other costs, government spending is also expected to rise. Primary industries that need more funding are health and public departments, which are likely to get a 1% funding increase from the government.

International trade costs will be higher due to flight and movement restrictions. Notably, a 1% increase for the chains which merged with other international businesses, and a 5% increase for businesses related to travelling, studying and leisure.

The global pandemic has shown people the true value of money. In the future, people are likely to be more conscious of their costs. Private consumption will decrease, leading to approximately 0.5% increased people’s savings.

In summary, Thorpe and Loughridge estimated that Australia would lose about A$34.2 billion in gross domestic product (GDP), according to their research for PWC.

Way forward

What many scientists argue about is the approach to the pandemic. On one hand, experts think that elimination is the only way of containing the virus, especially after Jacinda Ardern’s successful crisis strategy for New Zealand. On the other hand, others argue that suppression is the least expensive way of coronavirus prevention while trying to maintain life as normal as possible. NSW Premier Gladys Berejiklian seems to be in favour of the suppression approach, alongside PM Scott Morrison. In these unprecedented times, it is unlikely to know for sure which strategy is better. Each country will need to choose the best path for them, according to well-calculated risks and after analysing what will need to be sacrificed in order to gain a normal life back.

Unpredictable future

It is still uncertain for how long the pandemic will last. At the very beginning, governments and health professionals aimed to first and foremost stop the spread. However, severe outbreaks in countries like Italy, the United States, Brazil, Spain, and France have shown that COVID-19 prevention was not effective. What still seems to be one of the key concerns is how industries will go back to normal once the pandemic starts to lose its pace. Like Australia, many countries rely on trade with China, but due to restricted flights and industry contraction, it is currently unlikely that people will experience business as usual anytime soon and the humankind will likely need to adapt and operate in a changing world.

ALSO READ: The milieu between China and Australia when it comes to trade talks


Disclaimer
The content, including but not limited to any articles, news, quotes, information, data, text, reports, ratings, opinions, images, photos, graphics, graphs, charts, animations and video (Content) is a service of Kalkine Media Pty Ltd (Kalkine Media, we or us), ACN 629 651 672 and is available for personal and non-commercial use only. The principal purpose of the Content is to educate and inform. The Content does not contain or imply any recommendation or opinion intended to influence your financial decisions and must not be relied upon by you as such. Some of the Content on this website may be sponsored/non-sponsored, as applicable, but is NOT a solicitation or recommendation to buy, sell or hold the stocks of the company(s) or engage in any investment activity under discussion. Kalkine Media is neither licensed nor qualified to provide investment advice through this platform. Users should make their own enquiries about any investments and Kalkine Media strongly suggests the users to seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice), as necessary. Kalkine Media hereby disclaims any and all the liabilities to any user for any direct, indirect, implied, punitive, special, incidental or other consequential damages arising from any use of the Content on this website, which is provided without warranties. The views expressed in the Content by the guests, if any, are their own and do not necessarily represent the views or opinions of Kalkine Media. Some of the images/music that may be used on this website are copyright to their respective owner(s). Kalkine Media does not claim ownership of any of the pictures displayed/music used on this website unless stated otherwise. The images/music that may be used on this website are taken from various sources on the internet, including paid subscriptions or are believed to be in public domain. We have used reasonable efforts to accredit the source wherever it was indicated as or found to be necessary.

   

Kalkine

Rated 4.3/5 based on 904 Reviews at Google My Business