09 Jun 2020
Posted in Business Fundamentals
COVID-19 exacerbates economic struggle of Australian cities, says GlobalData
The containment measures adopted to reduce the spread of COVID-19 pandemic has resulted in severe loss in output along with record job losses that is likely to push major cities across Australia into recession in 2020, foresees GlobalData, a leading data and analytics company.
Australia’s two-way trade in goods and services, which accounts for more than 45% of nominal GDP, made the economy vulnerable to externalities. High frequency data including payroll data, the number of seated diners and foot traffic have reflected slowing economic activities in the country since 23 March 2020 owing to strict containment measures, including travel restrictions and social distancing rules.
Aditi Dutta Chowdhury, Economic Research Analyst at GlobalData, states: “Looming global recession following COVID-19 pandemic is likely to hit Australia due to weak external demand and sluggish domestic economic activities in 2020. The contraction of economic activity is expected to be more prominent in the second quarter (Q2) of 2020. The upcoming data on job losses reflect the dire situation. GlobalData expects Australia’s economy to contract by 4.9% in 2020 with an unprecedented toll on labor market resulting in 7.6% unemployment rate.
“With reduction in the number of infected cases, lockdown measures started easing gradually and domestic economic activity resumed. The government is providing financial assistance to support the household and business to survive the crisis. However, international border closure may still be in place for an extended period of time.”
Sydney, Perth, Melbourne, Adelaide and Brisbane are the territorial business hubs and financial centers in Australia. Irrespective of the sectors driving these economies, cities across the country are likely to contract in 2020. Real economy of Sydney and Melbourne are projected to contract 4.2% and 4.0%, respectively, and unemployment rate to spike to 5.7% and 5.9%, respectively, in 2020. Consumption expenditure is expected to remain subdued resulting from lower discretionary expenditure due to higher unemployment and lower income. The major downside risks stemming from its key sectors will threaten its recovery.
Business investment will be mostly put on hold as the firms will first use up the excess capacity with the rise in demand. However, the investment plan either will be cancelled or deferred. Dwelling investment will sharply decline in this period of uncertainty and job insecurity. The Reserve Bank of Australia has estimated 17% plunge during July 2019-June 2020.
Resource rich Australia will have severe impact on mining output from the demand shock. Chinese economic slowdown is likely to exacerbate the impact as China is the key trading partner of Australia, accounting for 40% share of the total mining exports. Higher education sector of the country has high reliance on international students while China is the main source market. The geopolitical tension between China and Australia along with international border restriction for unknown period will undermine the sector growth
Given the unprecedented magnitude of the ongoing bushfires and the frequent smoke events in Sydney, Canberra and Melbourne, the impact on consumption and tourism is significant. Increasing international travel restriction globally since March 2020 had further exacerbated the woes of falling international tourists. China accounts for around 50% of the total international tourists received by the country.
Chowdhury concludes: “According to Tourism Research Australia, the country recorded tourism trade deficit of A$19.2bn in 2018-19 indicating outbound tourism exceeds inbound tourism. International travel restriction, which is expected to encourage outbound Australian tourists to travel locally, will stimulate domestic tourism revenue in the country while offset the negative impact of falling revenue from international tourism segment to survive the crisis.
“Reserve bank is adopting zero-bound policy rate and various measures to inject liquidity in the banking system through term funding facility to support lending to business, also supporting smooth functioning of financial markets through daily market operations, purchasing government bonds, establishing foreign exchange swap line. These measures are likely to help the economy rebound in 2021.”