Australian economy fragile amidst virus uncertainty - Are there any pockets of Opportunities?

From dollar depreciation, declining long-term government bond yields, decreasing business outlook to falling stock markets in the recent past, the Australian economy also doesn’t seem to augur well amidst the coronavirus outbreak.

Few key highlights of the Australian economy -

Dwelling approvals moderated in January

The total dwelling approvals fell 15.3% in January in seasonally adjusted terms, owing to a 35.5% fall in private dwellings excluding houses. This was majorly due to plummeting dwelling approvals for units in Victoria. The total dwelling unit approvals for Victoria were down by ~34% month on month in January in seasonally adjusted terms. Nonetheless, approvals in New South Wales and Queensland increased.

However, overall picture presents a recovery phase for the housing market. As per the CoreLogic Home Value Index report of February 2020, housing values across the country went up by 1.1% over the previous month (January) with Sydney and Melbourne being the strongest performers accounting for highest capital gains at 1.7% and 1.2% month-on-month, respectively. Darwin was the only city to show a negative growth of 1.4% over January. Home values in Sydney and Melbourne also grew at 10.9% and 10.7% annually for 12 months ended February.

The upward trend in the housing market signals a recovery across the geographies, as better access to housing credit, rising home prices and lower mortgage rates stimulate the demand from buyers.

Current account surplus falls in December quarter

The current account surplus of Australia stood at $0.95 billion in the December quarter from $6.50 billion in the September quarter in seasonally adjusted terms, depicting a decline of around 85%.

The data reflected that exports of non-rural goods fell 6% to nearly $76 billion, as prices of coal, coke, metal ores and minerals went down while exports of rural goods like meat and cereal grains increased.

Fall in the prices of major export items like coal majorly accounted for a deficit of $0.2 billion in services exports.

Company profits fall by 3.5%

As per business indicators data of ABS, company gross operating profits fell by 3.5% in the December quarter, on a seasonally adjusted basis, primarily owing to an 8% decline in company gross operating profits in the mining industry. The numbers reflected the drought and bushfires impact.

However, the seasonally adjusted estimate for inventories grew by 0.3%, and even wages rose by 1% in the quarter of December, showing some vigour in the jobs market.

Australian markets and currency up for a slide?

Recently, Australian dollar showed a significant decline, after it reported multi-year lows (US$0.64) on 28 February 2020, on account of higher risk aversion by investors and demand contingent export economy subject to coronavirus. However, AUD has gained slightly amidst interest rate cuts by RBA and US Federal Reserve.

Australian stock markets have been falling from the past week. The S&P/ASX200 was about 110 points down at the close of trading session on 4 March 2020, on coronavirus fears after a spike in cases in other countries like Italy, South Korea and the US. Another reason for the fall in markets could be disappointing PMI data for the Chinese economy, which came as a surprise for the markets.

Falling Chinese output affecting companies in Australia

China is the largest trading partner for Australia, which is the 7th largest goods trading partner of the Asian nation. In 2018, the two-way trade between the two countries was valued at $214.6 billion.

China’s factory output plummeted to an all-time low in February. As per PMI data released by the National Bureau of Statistics, the composite PMI (combines manufacturing and non-manufacturing) index fell to 28.9 in February 2020 from 53 in January 2020 on a seasonally adjusted basis, portraying a bleak picture of the world’s second-largest economy.

The manufacturing PMI fell to 35.7, which was 50 in January 2020, while China’ non-manufacturing PMI declined to 29.6 from 54.1. Falling numbers show the difficulties of Chinese manufacturers amidst coronavirus. Vanishing of new orders, plummeting output and falling export-import are some of the factors that China has been struggling with over the past months.

The PMI numbers have shattered the expectations of analysts who didn’t envisage such a significant fall in PMI numbers. This will affect traders and suppliers in Australia due to shortages in various sectors like electronics, toys and clothing and further the consumers. Scarcities are expected as the vast majority remains in lockdown and are subject to travel controls.

RBA cuts interest rates by 25 basis points amidst weak sentiment

With the consumer sentiment falling as fears of coronavirus loom, the economic environment has been very uncertain. The travel, transport and hospitality industry of Australia has been shaken by the travel ban imposed on China since February 2020 to prevent the spread of the contagious virus.

Taking all this into account, RBA on 3 March 2020, announced a 25-basis point cut in interest rate to stabilise the markets and protect the Australian economy from coronavirus fears. Weak business confidence, consumer spending and GDP growth along with rising unemployment rates prompted RBA for the interest rate cut.

Uncertainty prevails that RBA rate cuts might not be able to translate into increased spending due to unavoidable spread of coronavirus.

A prevailing uncertain outlook due to rising impact of coronavirus has put trade, employment and economic output of Australia in jeopardy.