What is the expected impact of the coronavirus on the Australian economy?

 

What is the expected impact of the coronavirus on the Australian economy?

David Chu, Head of International Business, discusses the expected impact of the coronavirus on the Australian economy.

2020-03-03

David Chu, Head of International Business, recently sat down with Thomas Sung (host) on the SBS Radio Cantonese Program to discuss the expected impact of coronavirus on the Australian economy. Listen to the podcast episode in Cantonese or read the transcript of his interview in English below.

English transcript:

Host: David, as we can see, this novel coronavirus pneumonia breaks in in full fury. More and more data are showing that its impact on the Australian economy is even stronger than SARS. Even the Treasurer said so. Then what is the initial assessment by the business community at this stage?

David Chu: Correct. Of course this novel coronavirus has a great impact on China. At the same time, many economists have started to find out its impact on the world economy. There are a few types of views in Australia. It seems that this coronavirus pneumonia tends to have a greater impact on Australia than SARS did, which broke out in 2003, about 17 years ago.

There are a few key factors. First is the current status of Australia, as compared to what it was 17 years back, involves a different level of connection to China’s economy. The then entire economic system of China is no more than one third of what it is today. Therefore, whatever changes in the economic growth of China, even just 1%, may have a more significant effect on Australia, which relies more on China than before.

For example, the three types of export products of Australia are largely related to China. First is iron ore. Prior to the emergence of this virus in China, iron ore accounted for the biggest portion of Australian exports to China. Overall, for China, if, because, now there is city lockdown, manufacturing has been affected, and a great number of infrastructure projects have been stopped. This of course results in a reduced demand for raw materials from Australia. No one knows how much is reduced. According to some recent media reporting, China has introduced some special contractual terms whereby certain contracts can be cancelled in the event of unexpected circumstances.

Host: Then this may hit Australian exports such as resources and mineral as well as oil and gas.

David: Yes. It has been reported by the media that China has already introduced such terms to some projects and contracts for natural gas, where such contracts can be cancelled. Two things can happen when we talk about cancellation. One is delay, the other is real cancellation, which simply cuts off the purchase. Some just delay, and will buy again after a while. In either case, of course, there will be an immediate impact on export. The second most impacted is, without doubt, education.

Chinese students now account for 25% of the students in all universities across Australia. Now there are restrictions on Chinese entering Australia. Many students cannot go back to school even if they want to. The relationship between universities and that between students…the tuition fees have been paid and are not refundable. Alternatively, some universities have taken certain responsive actions, such as putting their courses online, and making them accessible by Chinese students electronically or via the Internet.

Host: Exactly how many students will substantially be affected, based on the numbers?

David: More than 100,000 in our preliminary estimation.

Host: More than 100,000. Wow! If each of them pays $40,000 a year, that will be a huge sum.

David: A rather handsome amount. As I just mentioned, these 25% Chinese students contribute a big sum of $34 billion a year to the Australian economy. Therefore, if they cannot come back, the Australian economy will be affected to a certain extent. Third is tourism. This goes without saying. Flights are cut, people can’t leave home, so naturally Chinese tourists will decrease.

Last year, for example, Chinese tourists accounted for 15% of all tourists in number terms, contributing $12 billion to $16 billion to the Australian economy for that year. In comparison, spending by Chinese tourists in Australia equals the total spending by American, British, Japanese and New Zealand tourists. So, this will depend on how long it will take for the virus to die out, when Australia will reopen its border to Chinese visitors. This determines how long tourism will remain affected.

Host: I have heard that the mud crab is much cheaper now, $11 per ½ kg, down from the earlier $60 per ½ kg. 

David: That depends on where you buy it. We have some friends talking about this. Many food exports to China are facing challenges, the mud crab being one of them, and lobsters as well. Take the Antarctic crab for example. On the one hand, media reporting says lots of exporters have piled up their stocks which have become unsalable, but many of our friends have not found any price drop in restaurants. This may take some time for businesses to re-adjust.

Host: Faced with so many impacts now, substantially how much, or predictably how much loss may be caused to the Australian economy?

David: There have been some preliminary assessments recently, the most optimistic of which came from the RBA. The RBA President said a couple days ago at the hearing that this virus, just like SARS, will bring a short-term impact, but we may catch up in the second half of the year, so it should not have great effect on the Australian economy. At this stage, he maintains his initial view that Australia achieved approximately 2.75% in economic growth for 2019. He also mentioned that uncertainties were many. Though the impact of [the current virus] will be stronger than SARS, he maintains such a view for the time being.

According to ANZ, their economic experts said that Australia might be affected in the first one or two quarters, but will be able to catch up in the last two quarters. They also said the impact might not necessarily be significant at this stage, but the scale of such impact was still unknown.

Host: Yes. That depends on the development of the epidemic.

David: Yes. On the part of Westpac, they said they have adjusted down to 1.9% from their original estimate of 2.1%.

Host: From 2.75% to 1.9. That’s harsh.

David: Yes. You may find a big difference between the RBA and Westpac, but now it is still too early to make any comments. Another thing is, Standard & Poor, a rating agency, has preliminarily adjusted down their forecast of China’s economic growth for this year. Their earlier forecast was 5.75%, but now they said it might drop to 5%. Is it true that it will drop from 5.75% to 5%? No one know yet. How much will the Australian economy be affected if it drops from 5.75% to 5%? No one has any rough ideas yet, since we still have more than half of a year’s time to deal with it.

Host: Many people say in their analysis that after this epidemic, momentum will be restored rather swiftly. That’s what happened in the past. However, we still need to be well prepared while waiting for the end of the epidemic. 

David: Sure we hope this will pass as soon as possible.

Host: Correct. Great thanks to Mr. David Chu, Head of International Business of ShineWing, [for sharing] with us what impact can be expected of the novel coronavirus at present on the Australian economy. Thank you!

David: Thank you Thomas! Thanks everybody!

Get in touch

David is attuned to the Asian listed company market, international taxation issues, corporate regulations and various stock exchange requirements and is highly regarded in the market place. Reach out below to discuss how we can support your business during this challenging time.

David Chu

E dchu@shinewing.com.au


This podcast was originally published on SBS Cantonese Radio.
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