Coronavirus Crushes Hopes For Stronger Global Economic Growth

Crashing global equity markets, dip in consumer and business confidence and 10-year bond yields at record lows have raised eyebrows all across, with investors rushing to safe havens..

The respiratory illness has already resulted in supply disruptions, weak demand, air travel restrictions along with hitting tourism, travel and trade linkages all over the world. The economic costs of the world’s worst health crisis are rising day by day.

IMF now expects 2020 growth to be below 2019’s 2.9% growth rate.

As per IMF January report 2020, it expected growth to strengthen to 2.9% in 2019 to 3.3% in 2020. However, the rising spread of the virus has shattered all hopes of growth recovery, with 2020 global output gains expected to be at their slowest pace since the financial crisis of 2008.

China Lockdown Expected To Dim The Australian Economy

The outbreak will have a significant impact on Australia’s near-term growth outlook.

Australia is China’s sixth-largest trading partner and fifth-biggest supplier of imports. China is part of the supply chain for all consumer products. China shutdown is expected to soften the Australian growth by affecting three sectors, majorly Tourism, Education and Exports.

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Tourism: As per ABS, 9.4 million short-term visitors arrived in Australia in the year 2019 of which 1.45 million were from China North and South East Asia, North-West Europe, New Zealand, Oceania and Antarctica.

However, after rising cases of coronavirus, Australia had banned tourist arrivals in the country. Further, China is also taking strong measures to restrict travel to and from affected areas.

Education: Thousands of Chinese students were restricted from entering Australia after their summer break for the schools and universities in February amidst coronavirus restrictions, when the government-imposed travel ban for most people coming from China.

International enrollments and exchange programmes will fall, which in turn will affect the financial standing of the universities.

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As per market researchers, Australian universities face high credit risks as Chinese students make up for 60% of the international students.

Exports: China is a major importer of iron ore, coal and LPG from Australia. About 25% of Australia’s manufactured imports come from China, and 13% of its exports are thermal coals to China.

However, since factories remain shut in China, demand for coal, LNG and iron ore has declined. Australia exports more than $60 billion worth of iron ore to China and is a major source of tax revenue. A fall in the sales and prices will significantly hurt Australia’s budget.

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Global Economic Growth To Dip Amidst Coronavirus Outbreak

More than tens of thousands of people have died from the coronavirus outbreak that originated in China. The respiratory illness has now been spread to more than 80 countries. It has also drenched the expectations of economic rebound and prompted an unscheduled US interest rate cut.

As per OECD, the world economy is projected to grow at its slowest pace since 2009 due to the virus outbreak. Any longer lasting and the more intensive outbreak could severely impact growth by reducing it to 1.5% in 2020.

The Eurozone and Japan economies could slide into recession, while any failure in UK’s post-Brexit trade talks can act as a considerable downside risk.

Italy’s economy is one of the toughest hits in Europe. The coronavirus spread has also fanned fears of an economic dip in US.

Growth in China is anticipated to fall below 5%- the slowest pace since 1990 from 6.1%, a year earlier. The decline in GDP is expected to be the result of a fall in industrial production, tourism and exports of China.

However, if the epidemic peaks in China and outbreaks are not contained in the first quarter of 2020, global growth could be cut by half a percentage relative to that expected in November 2019.

Government And Central Banks To Boost Stimulus Globally

Central banks across the globe are going for rate cuts prompted by share market sell-offs and economy fluctuations. RBA cut its interest rates by 25 basis point in its March 3 policy meeting.

The US Fed also surprised the markets with an emergency interest rate cut by half a percentage point on account of evolving risks from coronavirus. The new rate is between 1-1.25%.

Central banks have agreed to coordinate policy support to act in response to the rising risk to their respective economies.

The Government of Australia is expected to deliver a fiscal push to help businesses and build on the recent interest rate cut announced by RBA.

Outlook In The Near Term

The governments and central banks must be ready to step in with a fiscal stimulus when needed. Stronger health systems, proper nutrition and improved sanitation, can make people less susceptible to the virus.

The full impact on tourism and manufacturing industries is yet to be seen.

Overall, due to expectation of weak data on the Chinese economy during the first quarter of 2020, the rest of the world is likely to suffer that has a large trade share with China. Nonetheless, with proper measures and steps to contain the virus, recovery can be expected in the second quarter of 2020.