Australia goes back to the 1980s with its economy closed to the world.

Australia goes back to the 1980s with its economy closed to the world.

Australia

Australia’s success in curbing Covid-19 infections is allowing it to slowly ease some restrictions even as it remains largely closed off from the rest of the world, taking its economy back to the pre-globalization era.

Mining and agriculture continue to support exports and a government-sponsored group is looking at ways to revive manufacturing. But the flow of foreign tourists, students and immigrants has been frozen, pinning hopes for a rebound on local consumption.

The closed borders and domestic reliance has the economy harking back to the 1980s, before the lifting of tariffs opened up trade and Paul Hogan offered to put another shrimp on the Barbie for international visitors.

The capacity of services to quickly turnaround and the fact Aussies aren’t blowing savings on holidays abroad could help the nation fare better than many developed-world peers. Much will depend on the mood of households as unemployment rises, with a poor construction outlook adding to headwinds.

What Bloomberg’s Economists Say

“Close to 1 million Australians per month traveled overseas in 2019. They will now be looking for a change of destination, heading to Noosa instead of Nusa Dua; Port Douglas, not Penang; and catching up with friends at bars in Melbourne Laneways, instead of Hong Kong’s mid levels. Containment measures change the economics of international travel.”

James McIntyre, economist

Household consumption, which makes up around 55% of the economy, has been boosted on the one hand by people stocking up on essentials during the lockdown, but hammered on the other as they couldn’t eat out or go to the movies. Shops and restaurants are gradually reopening but, for consumption to drive any rebound, households must put aside concerns over job security and debt to drive spending. That may be tough.

Wesfarmers Ltd. is seeing shift in consumer behavior across its retail portfolio. Home improvement and office products stores, Bunnings and Officeworks, have seen significant uplift in sales, while general merchandise stores, Target and Kmart, have seen sales slow.

Even before Covid-19, Australian households were among the most indebted in the developed world, with debt almost double disposable income. The threat of unemployment to people’s ability to meet their debts is now key, and the Reserve Bank of Australia has long acknowledged it as a major risk facing the economy.

The unemployment rate is currently 6.2%, with the central bank expecting it to peak at around 10%. Banks are offering repayment holidays to help tide homeowners over and have quadrupled provisions for an expected surge in bad debts.

The absence of skilled migration due to closed national borders will also hit pause on what had been steady stream of profitable mortgage lending for the banks. That could flow through to housing prices if sustained.

Commonwealth Bank of Australia said its base case is for an 11% fall in home prices, though in a prolonged downturn a cumulative 32% slump is possible. National Australia Bank Ltd. said in a severe downturn, prices could plummet 21% this year.

Residential construction typically closely follows house price movements, and the sector was already scaling back activity following the previous flood of new stock still working its way into the market.

The RBA earlier this month said that indications from the initial stages of the development process suggests demand for new housing “has deteriorated significantly.” It expects dwelling investment to plunge 17% in the 12 months through June and remain a drag on growth until 2021.

Property investors have been hit by the six month moratorium on tenancy evictions during coronavirus. Without renewed interest from investors, it’s challenging to get a new apartment development, particularly of any size, into construction.

The same holds for business investment. Unless the project was already underway, or is related to creating a covid-safe environment, capital expenditure plans have been parked until demand returns.

Natural Endowment

Things look brighter as you leave the cities. Internationally, Australia is known as a commodity powerhouse. While it accounts for just 10% of output, it is a key source of export income and prosperity in the country.

Iron ore shipments from Port Hedland, a key export hub, hit a record for April, while gold sales from Perth Mint — the main refiner — also surged. Fortescue Metals Group Ltd. lifted its projected annual iron ore shipments in a wager on China’s recovery. “We are selling everything we can possibly produce,” Chairman Andrew Forrest says.

It’s less rosy for the liquefied natural gas producers. Just as the coronavirus sent the global economy into lockdown, Russia and Saudi Arabia began a standoff that sent oil prices tumbling below zero.

Top producers Woodside Petroleum Ltd. and Santos Ltd. have slashed spending plans and deferred flagship growth projects — worth over $15 billion — in line with drastic steps by energy majors worldwide to hunker down during the pandemic.

On The Sheep’s Back

As supermarket shelves were stripped bare, a panicked nation was reminded of the sheer mass of food the country’s farmers produce. Domestic food production services more than 90% of fresh produce sold in supermarkets and still is able to more than match that amount in exports.

The industry could also become an unexpected source of employment. Backpackers and workers from Pacific Islands flock to rural areas to pick up work with seasonal tasks, but with borders shut and jobs being lost across the economy, farmers are likely turn to the local community for the extra labor.

Other producers have greater worries. Barley and meat exporters have been caught in China’s crosshairs in retaliation for Australia’s public call for an independent investigation of the coronavirus outbreak, while the wine industry is looking on nervously.

It’s been a tough year for wine, even before the virus. Clonakilla winery in New South Wales, north of Canberra, decided against producing a 2020 vintage after analysis showed unacceptably high levels of smoke taint from wildfires over the summer.

Exploring Our Own Backyard

The education industry was one of the first to feel the pinch from coronavirus restrictions. When the government imposed travel bans on flights from China in February, around 100,000 international students were unable to enter Australia to begin the academic year and left universities bracing for a costly fallout.

The University of Sydney, where students from China represented nearly one-quarter of the total student body, projected a A$470 million loss this year. Other institutions, including the University of Melbourne and Monash University, are bracing for similar hits. Even smaller regional institutions that don’t attract nearly the same level of international students have been affected.

With a lot of money at stake, there could be a relaxation of international border restrictions for students to study in Australia, before leisure travelers are allowed. But for businesses catering toward an offshore audience, demand is unlikely to snap back.

Qantas Airways Ltd. is currently operating just 1% of its network and has canceled overseas fights until at least the end of July. Its main competitor, Virgin Australia Holdings Ltd., collapsed into administration in April.

Crown Resorts Ltd. and Star Entertainment Group Ltd., which both target big-spending visitors from Asia, were forced to close their casinos in Australia as the country locked down. Crown is just months away from completing a A$2.2 billion luxury gaming resort in Sydney.

The tourism industry was already reeling from the wave of cancellations following the December and January wildfires. The silver lining is that Australians will have no option but to spend holidays on home soil once inter-state travel is allowed again.

Leave a Reply

Your email address will not be published. Required fields are marked *

Pin It on Pinterest