Australia could be one of the countries worst affected by the economic impact of the coronavirus outbreak as factories in China remain shuttered and millions of people are confined to their homes and banned from travelling.
The Reserve Bank of Australia on Friday stuck to its forecast of strong growth this year thanks to a rising housing market, and the stock market – along with others around the world – has largely shrugged off concerns about the global impact of the virus to remain close to all-time highs.
But evidence is mounting that China is suffering a significant slowdown. S&P has downgraded its growth forecast for the world’s second biggest economy to 5% this year from 5.75%, predicting that the impact would spread around the world, while it seems clear that China’s lockdown is set to deprive Australia of billions of dollars in revenue from big spending tourists and students.
The standstill, typified by Toyota’s announcement on Friday that it is keeping its 12 factories in China shut for another week, is alarming investors such as Damien Klassen, who manages billions of dollars for Melbourne-based Nucleus Wealth.
“When you look at how this will affect other countries, what their exposure is to China, how big the economy is, what type of companies it has, then Australia ticks a lot of the boxes,” he said. “In terms of which countries will be most affected, we’re right up there.”
Alex Joiner, economist at IFM Investors in Melbourne, also sees a growing risk for Australia despite the optimistic forecasts from the RBA governor, Phillip Lowe, that the economy will expand by 2.75% this year.
The threat from the Chinese lockdown to tourism alone is very significant, Joiner says. China provides around 15-16% of visitors to Australia but they are the biggest contributors to the Australian bottom line when they are here, outspending American tourists by a ratio of three to one. Their spending of $12-16bn is greater than American, British, Japanese and New Zealand tourists put together.
“It’s not just the numbers of tourists – it’s that they spend quite a lot because of the way they travel with packages, how they get around and spending on shopping,” he says. “If that gets cut off it’s a material impact on the economy in Australia.”
The education sector – at $34bn, revenue from overseas students is Australia’s second biggest export behind iron ore – is also crucial, and again highlights how exposed Australia is if students cannot leave China to start their courses this month.
The ratings agency Moody’s said on Friday that Australian universities will be harder hit than those of any other country because of the relatively high proportion of international students, one quarter of whom are from China.
Joiner says that while mining might suffer in the short term – China declared force majeure on LNG shipments on Friday – it is likely to benefit from the stimulus measures Beijing is expected to use to kickstart things once the contagion ends.
But the service sector is different. “You can’t give stimulus to people to go overseas,” he says, “and you’ve got tourist destinations like Australia that now have restrictions on visitors.”
Economists at JP Morgan said on Friday that the coronavirus outbreak has “completely changed the dynamics of the Chinese economy”, although they agree with most experts that it is too early to forecast exactly what is going to happen.
However, some partial data released on Friday suggests the scale of the problem that is emerging, with figures showing that property sales in China’s so-called first-tier cities fell by 93% on 3-5 February compared with the same days last year. Railway passenger traffic was down 89% on 5 February.
So as well as the factory shutdown, Klassen points to the closure of many schools until the end of the month as a sign of paralysis and says that the resumption of normal activities involving large gatherings of people such as eating out, or going to the cinema and sporting events, seems unlikely for weeks or even months.
The global impact could be much greater than many expect and possibly even provide the kind of “black swan” event that could trigger a slump after the long boom enjoyed since 2009.
“The economic impact might be enough to force the world economy into recession,” he says, dismissing the prediction by Chinese officials on Friday that the economy will bounce back as it did after the Sars outbreak in 2003.
“People say it will be like Sars … But the Chinese economy was a quarter of the size back then. Hyundai saying this week they can’t make cars any more [at its giant Ulsan plant in South Korea] because they haven’t got any parts – that didn’t happen back then.
“We’ve pulled back all our holdings. There’s no sense trying to squeeze any more from the lemon. I don’t know what will trigger the end of the cycle but there’s a pretty good chance that knocking out half of China’s GDP for six months is going to do it.”