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Corona virus brakes China, hurts Australian economy

Last updated on 6 February 2020

No one knows how long the coronavirus outbreak devastating China – and forcing the World Health Organisation to declare an international emergency – will last. Or how far it will spread.

What we do know is that the Morrison government reacted swiftly and sensibly in opening up its facilities on Christmas Island as a quarantine station for those evacuated from Hubei province and its major city Wuhan. (His faltering reputation was not helped by his acceptance of bad advice that he should charge evacuees $1000 each for the trip, a silly move he has since reversed).

We also know that the impact on China’s slowing economy will be significant. Already the scale of the epidemic and the number of deaths has outpaced the numbers of the SARS outbreak of 2002-2003, which caused panic across the region.

Today’s epidemic, which has splintered into almost every country in the Asia Pacific (except New Zealand and Indonesia to date) will cut more than a percentage point off China’s economic growth in the first quarter, pushing GDP growth down below 5 per cent. 

It could go down more, especially if the authorities are unsuccessful in tightening movements of people in and out of China. Hong Kong, already shattered by the impact of the pro-democracy protests, could also suffer, where its beleaguered chief executive, Carrie Lamb, is under pressure for failing to subdue the movements tens of thousands of people that cross its land border each day, with numbers inflated by those returning to the enclave from Chinese lunar celebrations.

Airlines, including Qantas, British Airways, Lufthansa and Cathay Pacific have stopped most flights in and out of the Peoples’ Republic, and some are offering full rebates for cancellations and no-fee changes. Significantly public service offices in Hong Kong have told staff to work from home, many private sector firms have followed suit, we know of two law firms who have sent Australians to work out of their Sydney offices for the duration. The Hang Seng index tumbled after reopening after the holiday, and market traders are poised for a further correction. During SARS the main Chinese share markets fell by about 10 per cent.

But the coronavirus outbreak is not the only factor to make the celebrations of this lunar new year festivities somewhat muted. These factors should be taken into account by Australian strategists in assessing the impact on our economy, especially the resources sector. They include the ongoing trade war with the United States, still unresolved despite Trump’s assertions that he has settled a conflict he started; a simmering rebellion in Hong Kong, and an economy struggling to cope with regional dissenters, a falling birth rate, bad loans, and a transition to greater domestic consumption that is taking longer than expected. 

What is often overlooked that in this attempted shift, many export-orientated international corporations have closed factories in China and moved them elsewhere. Two notable examples.Samsung, the world’s largest smartphone maker, is ending production at its factory in Tianjin. Pegatron, which supplies components for Apple products, announced it is shifting to a new factory in Indonesia. Last year Japan’s Panasonic, Suzuki and Nikon all moved production out of China to Thailand, Singapore and other parts of ASEAN. Foxconn is reported considering alternatives to the PRC.

The global economy is also faltering. Trump’s America has enjoyed good growth at the expense of burgeoning debt. But the benefit has been felt more by stockholders than workers in the rust belt. Europe, particularly Germany and Britain, is slowing down, and commodity prices are falling. Also, the price of oil has tumbled by more than 20 per cent since the corona virus broke out. Iron ore prices are down by about $US10 a tonne. Copper is riced 13 per cent lower.

Australia, a country that depends for survival on its land mass, selling grain, food and mineral’s, is facing a tipping point. As our competitiveness continues to slip, and the Morrison government does nothing to avert the big risks to our continent’s environment, our exports are likely to take a hit. Oddly the one major export that is likely to hold its own in 2020 in coal, with demand from China continuing to rise, especially from a reliable and close supplier like Australia. 

But it is Australian tourism that is likely to feel the most pain in the short term, mostly as the result of the Morrison government’s ban on new arrivals from China, the country that provides the bulk of visitors this time of year. The Financial Review reports that corporate travel is down 17.8 per cent since January 20, and the drop in leisure travel is likely to be mu h greater when statistics become available, as most visitors from China come in on cut price seats on PRC carriers like Air China, China Southern and China Eastern. 

The ABC’s top business reporter, Peter Ryan, has also reported that the epidemic could result in a multi-billion dollar blow to our universities – because Chinese students are not returning to take up their courses, and internet bans are hitting distance learning.

The travel ban does not mean Australia is immune from the coronavirus. So far 12 cases have been confirmed – one of the highest per head of population, and state capitals are still vulnerable to potential infection carried in by Australian citizens, including ethnic Chinese, returning from visiting relatives in mainland China and Hong Kong.

No wonder travel related stocks on the ASX are down. Some strategists may see this as a buying opportunity, but we believe all stocks may have further to fall, as the economic outlook for Australia is not good. Meanwhile Scott Morrison has further worries as the Liberals coalition with the National Party is in danger of rupture, with the resignation of cabinet minister Matt Canavan. He is lining up to support the Nationals’ former leader Barnaby Joyce who is trying to wrest back control of the party on a policy of backing expansion of coal mining and opposing environmentalists supporting urgent action on climate change. 

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