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Coronavirus Affecting Australia’s Economy

Australia’s economy is unusually dependent on China, and the coronavirus outbreak could mean billions in lost revenue.

Australian exporters are already feeling the effects of the virus. Exports to China make up 38% of the Australian export market, and the virus has reduced the demand for many goods and services.

The tourism industry is also suffering from the outbreak. Chinese tourists are the biggest contributors to the Australian bottom line when they are here. In the last 12 months Chinese tourists spent an estimated $3 billion in Victoria, outspending American tourists by the ratio of three to one. The current travel ban is blocking thousands of Chinese tourists as well as students heading to the country.

Education Minister Dan Tehan has warned that unless there is a breakthrough within the next few weeks, and Chinese students that are due to study in Australia can leave China to start their courses this month, the economic impact on the nation’s education sector will be crucial. There are even concerns of long-lasting reputational damage. “There is a risk international student numbers will drop and not recover after this crisis”, said Liam Donohoe, president of the University of Sydney Student Representative Council.

The education sector is Australia’s second biggest export behind iron ore, with a revenue from overseas students of $37 billion. It is likely the virus will have a larger impact on the Australian universities than those of any other country because of the high proportion of international students, of whom one quarter are from China. As of today, more than half of the roughly 200,000 Chinese students due to begin studies in Australia are not able to enter the country.

The travel restrictions have the most impact on small businesses within retail, restaurants and tourism operators. Henry Cutler, the director of Macquarie University Centre for the Health Economy, says these businesses have less capacity to deal with a sudden or protracted loss of income and it is hard to say how well they are able to hold out while waiting for a breakthrough.

As if that wasn’t enough – Australia’s close economic ties with China and the potential damage the virus will have on the Australian economy is filling currency traders with fear. Richard Grace, head of foreign exchange strategy at Commonwealth Bank, says the dampening economic impact of coronavirus together with bushfires and drought are weakening the Australian dollar. As coronavirus deaths escalate in China, traders walk away from risky currencies, such as the Australian dollar, and flock to the perceived safety of other currencies, like the US dollar.

Rodrigo Catril, currency strategist at National Australia Bank, agrees that the correlation between coronavirus and the performance of the Australian dollar is strong and the most important driver in the short-term for the Australian dollar remains the virus impact in China. He says that the Australian dollar will regain some ground if we start to see factories reopening and travel restrictions lift, but if there is further delays the dollar will remain under pressure.

During the SARS outbreak in 2003 the GDP dropped for a quarter, but as the Chinese Government pushed forward a stimulus program to get the economy moving again the economic growth accelerated again the next quarter. Chinese officials are expecting the same thing to happen this time, and if so, it is unlikely to have too much of an impact on Australia.

Damien Klassen, head of investment at the Melbourne-based Nucleus Wealth, is worried about the economic impact. Toyota’s announcement on Friday that it is keeping its 12 factories in China shut for another week is alarming for investors like Klassen. He does not agree with the prediction by Chinese officials that the economy will bounce back as it did after Sars outbreak 2003. The Chinese economy was only a quarter of the size back then. Klassen claims that the economic impact now might be enough to force the world economy into recession.

A potentially positive outcome for the Australian consumers is that we could see lower petrol prices as a result of the coronavirus, driven by a drop in demand of oil from China, the world’s largest oil importer. However, the price drop won’t come immediately.

It’s impossible to know how severe and sustained the spread of the coronavirus will be. However, as factories in China remain shuttered and millions of people are banned from travelling, it is obvious that the impact on the economy will be significant. Looking at countries’ exposure to China, how big the economy is and what type of companies it has, Australia ticks a lot of boxes and will presumably be one of the countries most affected.