What will be the likely effect of COVID-19 on the Australian Economy?

At the end of January we included in our monthly report to clients our thoughts on the economic impacts in Australia of the Coronavirus (2019-nCov) subsequently re-named COVID-19.  We acknowledged the situation was a dynamic one, but there were only two possible outcomes being the virus is eventually contained in a similar way to the SARS outbreak in 2003, or the virus is not contained in a similar way to the Swine Flu global epidemic in 2009-2010.

At this stage the situation is still uncertain, but some variation between the two is seemingly becoming a more likely third option.  While technically the virus is either contained and eradicated, or not contained and becomes widespread, the third scenario is the virus is contained for an extended period of time, sufficient for treatments and vaccines to be developed before it becomes “not contained”.

Our logic in contemplating this third scenario is that experience on the Diamond Princess cruise ship indicates how contagious the virus appears to be where one person can cause the spread of the virus to over 600 persons in just over two weeks and this is despite quarantine efforts.  Also of concern is once testing was extended from those persons who had symptoms to those that did not, it became clear there were significant numbers of persons who were infected but had no symptoms.  If these people are contagious and able to infect others, then stopping the spread of the virus within communities will be extremely difficult.

The second fact supporting this argument is the number of infections in South Korea, Iran and Italy and to a lesser extent Singapore, Japan and Hong Kong where cases are rising.  In these countries, the virus has essentially “escaped” in that efforts to trace all the persons infected from an initial carrier have likely failed and the virus is now circulating in the community. If new cases cannot be isolated quickly enough, then the virus cannot be eradicated and will either continue to circulate at low levels for a long period or if it is highly contagious then numbers of infections will rise rapidly and more extreme “Wuhan type” measures will be necessary. Countries with currently contained infections will likely begin to institute travel bans on anyone coming from these places to other countries similar to the ones in force currently for China.

Economically, the impact of steps to contain the virus being isolation, quarantine and travel restrictions are likely to be extremely disruptive. The full effects of factory shutdowns in China have been ameliorated to date as inventories have been run-down to cover production disruptions at customers and built up to avoid production disruptions at suppliers. However, this is a temporary situation and it is only recently the flow-on effects of the shutdowns on business in Hubei province have really begun to affect other parts of what is a very large and complex supply chain.  It currently appears as if the restrictions will need to stay in place for much longer than initially forecast by optimists because the COVID-19 virus is both deadly and contagious. Further as has been seen with the recent spread of the virus to other countries, efforts to contain it are likely to cause economic disruption locally which may be mild at first, but may become more severe over time if the virus continues to spread. For example, it would be fair to say the Tokyo Olympics are under threat of cancellation at this point if the local situation in Japan worsens in the next 5 months

Amicus predicts this will have a greater effect on Australia than other countries because of our very close links to China and the facts that China is our largest trading partner due to resource exports, one in four of our international students are from China and one in six of our tourists are from China.  It is not unthinkable the impact on Australia will be enough to cause negative GDP growth within our economy in both the first and second quarters of this calendar year.  Of course, this is the technical definition of a recession and in such a circumstance the RBA will almost certainly look to cut interest rates from their current levels and also probably introduce other emergency measures as well.

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