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The broadening health impact of the coronavirus around the world has triggered a major financial market reaction. This has been seen most prominently in the sharemarket, with the ASX down by 748 points, or 10.5% from the start of last week to COB Monday. But it’s appearing elsewhere as well:
· Australian 10 year bond yields have fallen from 0.96% to 0.81% (while their US counterparts fell to a record low of 1.03, having been as high as 1.9% in December).
· Global oil prices have skidded, with Brent Crude down by 10.4% to US$51.90 on the view that a sharply slowing global economy will demand less oil.
· The $A yet again hit a fresh 11 year low of US64.34¢ over the weekend, and remains susceptible to further falls.
But overnight, the US market rallied on the expectation that these falls (and lingering risks) would force the hands of central banks to further ease monetary policy and governments to turn to fiscal stimulus. The same is true here, which pushed the ASX to open 90 points higher this morning.
And these expectations aren’t too off the mark. Hours ago, we saw the RBA cut rates to another historic low of 0.5%. In doing so, they said:
“The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors. The uncertainty that it is creating is also likely to affect domestic spending."
To be clear, the improvement in financial markets over the last 24 hours is not enough to make up for the losses through this year. And in some ways, financial markets are playing catch-up here as the fallout has already been accruing across the Australian economy for weeks, particularly in key sectors.
Deloitte Access Economics has estimated the broader economic impact. Based on travel bans being in place until mid-April, and without a broader lockdown in Australia, our modelling suggests that around two-thirds of Australia’s expected growth in national income in the first half of 2020 – some $5.5 billion – will be wiped out.
That needs to be considered in perspective. After all, Australia’s national income is two trillion dollars a year. Even so, the loss of $5.5 billion is a substantial economic hit, and comes at a time when economic growth had already moved down, and business and consumer confidence is already fragile.
And the scenario could get worse from the one modelled here. Australia’s travel ban was extended from China to Iran on the weekend, and health authorities appear to be readying themselves for a larger outbreak in Australia.
Of course, the economic hit won’t be evenly shared, with international education and tourism seeing particular challenges. Our preliminary tourism forecasts show there could be a drop in international tourist arrivals of between 10 to 15% through 2020 (with the coronavirus building on bookings cancelled from western markets when the bushfires were at their peak).
We are now seeing data from China that shows what its broader business and society shutdown amounts to in terms of economic impact. China’s National Bureau of Statistics reported that its purchasing manager’s index (PMI) for manufacturing fell sharply from 50.0 in January to 35.7 in February, a record low. This is an even deeper decline in activity than took place during the global financial crisis in 2008-09. In February, the sub-index for export orders fell to 28.7, indicating that global supply chains are being severely disrupted.
These are dire numbers and they could get worse if the coronavirus induces a global recession or we suffer a significant epidemic in Australia. However, it is also important for business to keep in mind the likelihood of a sharp recovery from this downturn (timing unknown), and the importance of keeping capacity in place as the recovery takes hold. But ahead of that, the economic fallout will be challenging.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.