The Economics of COVID-19: Risks and Opprtunities
As new cases of coronavirus are confirmed in Australia, we are bracing for the economic impacts. The share market is falling in the wake of a global sell-off, which highlights the deep interdependence of our island economy.
Behaviourally we are witnessing our neighbours hoarding toilet paper, international travellers being quarantined, and most recently, calls for our major cities to be locked down in advance of an epidemic. On the back of a prolonged and damaging bushfire period followed by flooding rains the prospect of an epidemic is just the next 2020 challenge for a physically exhausted and emotionally drained Australian public.
While the impact of Coronavirus on the Australian economy is real, how severe is the impact? How does the Australian economy recover from such events and what are the opportunities to move forward domestically and globally?
Synergy’s Advanced Modelling Group (AMG) has been looking beyond the immediate but also into our economic history to answer these questions.
An economic effect in two parts
The effect of the coronavirus has added to the economic challenges the Australian economy will need to respond to in 2020. The devastating bushfire season followed by floods have added to Australia’s usual economic pressures. While we have seen the best of the Australian community’s response to the immediate crisis, it is the long tail of this disaster that will impact most on community resilience.
The full impacts on specific industries will gradually emerge over the medium and longer term. For the general population, the coronavirus is an unexpected event that will bring home to more than a few Australians the extraordinary depth of Australia’s economic dependence on China’s economic performance in terms of trade and supply-chain dependency. China is Australia’s main trading partner representing approximately 33% of exports. These exports are largely in coal, iron ore and liquid natural gas (LNG). Additionally, 38% of Australia’s international students and 15% of all tourists originated from China. There is no escaping that, economically, Australia is impacted directly by events in China.
Figure 1 shows the correlation between major global events and the performance of the Australian economy. Global events such as SARS and Swine Flu were associated with downturns equivalent to global trade conflicts. These are major shocks to the global economy that the Australian economy feels deeply. The full effect of the coronavirus is not yet clear, but our economic history provides us with reasons to be alert.
Figure 1. Productivity growth impacted by global events
Source: ABS 5206.0, 6291.0.55.001, Synergy AMG calculations
We know that disruptions associated with the labour markets are far more severe than disruptions in the financial markets. Crises in financial markets are relatively easily solvable through effective capital management. Crises that have real impacts on populations are far more difficult to address and have far longer lasting consequences for workforce, and therefore economic production.
Addressing the impact on the confidence of an already battered population, ensuring the continued productivity of the workforce in a time of uncertainty, and maintaining the confidence of our trading partners will require a thoughtful and sustained approach. This is the long tail of our economic challenge.
What are the likely economic effects of coronavirus?
Australia is a small open economy with a strong commodity export focus. We are vulnerable to large risks from disruptions in global supply chains and this is precisely the most likely effect of coronavirus on our economy.
Given the current impact of coronavirus on China’s manufacturing activities, it is expected that the order of magnitude of supply-chain disruption originating in China will carry a much larger impact onto the global supply-chain. Thousands of companies around the world may significantly reduce or temporarily suspend manufacturing in Asia, Europe and United States. The most susceptible companies will be those heavily reliant on inputs manufactured in China with just-in-time supply chain strategies. The uncertainty over the coronavirus crisis is weighing not only on business and investor sentiment, but also heavily on normal households facing moral hazard. The just-in-time manufacture of toilet paper in Australia is a worked example of a global economic effect.
Australia’s economy is facing a significant challenge but there is also an opportunity to strengthen our export connections with large regional economies such as India and Indonesia (the world’s second and fourth most populous nations).
By value, our two most important exports are LNG and iron ore with prices for both negotiated long before delivery dates. This feature of trade in these two commodities may lead to a medium-term impact on trade as importers of Australia’s commodities build stockpiles for later use, thereby reducing requirements to negotiate new contracts over the medium term.
For the time being, trade with our regional partners, including China, occurs primarily by ocean shipping. The duration of ocean shipping happens to clear the 14-day travel isolation requirements before ships can arrive at Australian ports. As an island nation, Australia’s economy is significantly dependent on shipping for both international trade (imports and exports) and coastal freight movements.
Major events that impact negatively on manufacturing worldwide will be felt deeply and thoroughly in Australia’s economy through trade. This effect will be cumulative and may be long-lasting.
We can commence seeing significant impacts starting in mid-March 2020, when the 15-30 days’ worth of inventory in most goods is depleted, while the tech industry might have much shorter inventory (less than 7 days), for example, Dell, Apple and Samsung.
Looking for opportunity in crisis
Disaster events like the coronavirus also present new opportunities for Australia’s already established, as well as developing, industries to diversify the base of our exports to China and within the region, while continuing to build the quality name of Australian Made products and services locally and internationally. Four areas of long-term opportunity include: research and development, education, agriculture, and trade diversification.
Research and Development
Australian firms in the Human Pharmaceutical industry possess the production capacities of national importance to support the production of new vaccines and deploy highly efficient medication delivery devices. Research into new medicines and the provision of new medical equipment represent opportunities for a highly developed and capable Australian advanced manufacturing industry. Professional Services Research firms are well positioned to produce active research to design new vaccines and automated/robotic medical devices.
Education
While our educational institutions are facing immediate challenges in responding to the current travel restrictions; concurrently, they urgently need to adapt to on-line learning and industrialise the processes to support online learning for current and potential students. The divide between classroom and online will dissolve further potentially leaving the industry with a deeper capability and more options for delivering quality learning internationally. A reputation for quality and excellence is the benchmark for competing in the international education market. Australia has very strong foundations from which to build enhanced capabilities that are attractive to broader market.
Agriculture
The losses incurred by economies due to temporary and permanent losses in labour productivity and the associated disruptions in essential economic activities such as food production potentially provide an opportunity to provide agricultural commodities and food products to temporarily support an economy impacted by labour shocks.
The coronavirus outbreak might create new growth opportunities for Australian fertiliser industry which the agricultural sector is heavily dependent on. China leads the fertilizer production. Since the start of the coronavirus outbreak, China’s fertilizer industry utilisation rate has plummeted by 30-40%, which will undoubtedly affect the productivity and production potential of the agricultural sector. Australian fertiliser industry and agricultural sector might play a significant role to take advantage of the shortage opportunities.
Trade Diversification
There is an opportunity to establish new international oceanic markets by actively engaging with new trade partners allowing Australia to diversify its trade flows (especially exports) among current and new trading partners and provide new products on the international markets.
Not just economic, also human
The effects of coronavirus on the Australian economy are not yet clear but history tells us where to look. While we talk about epidemics as a crisis, we need to think beyond the immediate and more deliberately about our long-term response. There is a need to mitigate the immediate risks but also a need to look for opportunities to come out of this event economically stronger. Finally, we tend to see these events in financial and economic terms, but they are also human events. The critical infrastructure of Australia’s health system is its workforce. We are already beginning to see the effects of additional pressure on a human system working at full capacity. Our response should not just be economic and financial, it must also focus in building the capacity, capability and resilience of our national workforce.
Who are AMG?
Synergy’s Advanced Modelling Group (AMG) specialises in: Labour Market, Workforce and Demographic Modelling (incl. migration), Macroeconomic Modelling and Economic Impact Analysis, and Critical Infrastructure Modelling. Our team of experienced economists and modellers works closely with every part of Synergy’s business to provide our government and private sector clients with insight into the economic trends that affect policy, regulation, service delivery, and people. If you like to know more about AMG, contact Dr David Schmidtchen.
