Australia / Spotlight Reports
March Economic Update: COVID-19 and Cash Rate

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by Tom Youl
Mar 12 2020

The COVID-19 outbreak, currently dominating the global media landscape, is expected to notably limit the performance of the Australian economy over the remainder of 2019-20. At a broad level, a slowdown in GDP growth is certain. IBISWorld’s forecast of 1.6% growth in 2019-20 would signify a poorer result than that recorded during the Global Financial Crisis, with the Australian economy growing by 1.9% in 2008-09. The GFC looks likely to have been a more drastic event for financial and housing markets. However, Australia is now much more exposed to the fortunes of the Chinese economy, which has already recorded significant negative effects from the COVID-19 outbreak.

International trade-focused industries are likely to feel the brunt of the economic slowdown attributable to the COVID-19 outbreak. Decreased manufacturing and economic activity among many of Australia’s key trading partners is expected to result in weaker demand for domestic exporting industries. In addition, importing industries are likely to report disruptions to supply chains, primarily as a result of decreased manufacturing activity in China. This may result in a notable dip in revenue among trade-exposed companies. The most affected sectors are likely to include:

  • Fuel Retailing: Weaker demand from the Chinese manufacturing and global aviation sectors has resulted in oil prices falling significantly. This trend has been furthered by a price war between Saudi Arabia and Russia. Consequently, retail petrol prices are expected to fall strongly, benefiting consumers but constraining industry revenue.
  • Airlines: Qantas’ plans to reduce capacity (number of available seats) by up to 35% to some markets, and 23% overall, was in response to weak demand for overseas travel. Most global airlines have implemented similar strategies, aiming to keep prices at near-normal levels. As a result, the viability of some airlines may come under threat but low aviation fuel prices are expected to partially ease the significant pressure on sector profitability. Domestically, a modest decline in capacity, about 5%, has been indicated for the next six months.
  • Tourism: Travel bans and concern surrounding COVID-19 are projected to discourage inbound tourism to Australia, which is forecast to fall moderately. This decline is expected to further the pressure on sectors reliant on tourism, including accommodation and transport services, following the existing decrease attributable to the bushfire disaster.
  • Tertiary Education: Australian Universities derive a significant proportion of revenue from international students (24.8% pre-COVID). As the sector is particularly reliant on Chinese students, the ban on travellers from mainland China is expected to limit revenue in 2019-20.
  • Other affected sectors include: Agriculture, Food Product Manufacturing, Coal Mining and Grocery, Liquor and Tobacco Product Wholesaling.

    In response to ongoing sluggishness in the Australian economy and the impending effects of COVID-19, the Reserve Bank decided to reduce the cash rate on March 3 2020. The rate of 0.50% is the lowest in Australia’s history. This decision, as with previous rate cuts, aims to encourage household consumption (via lower borrowing costs) and stimulate business investment. However, previous rate cuts have had only a moderate effect on consumption. As previous rate cuts were reported to have contributed to negative consumer confidence, the overall effect may have even been detrimental to household consumption. The Federal Government has indicated it will initiate a fiscal stimulus package this week, reversing a long-held intention to bring the Federal Budget toward surplus.