S&P: COVID-19 will hit Australia hard

Via S&P:

China’s health emergency will disrupt economic activity throughout Asia-Pacific. S&P Global Ratings anticipates the region’s GDP will expand by 4.3% in 2020, 0.5 percentage points (ppt) lower than our pre-outbreak forecast. Our forecasts are subject to much more uncertainty than normal. We expect significant growth drags of 1 ppt or more in Hong Kong and Singapore, given their close linkages with, and heavy reliance on mainland China. Australia, Korea, Taiwan, Thailand, and Vietnam will also suffer. At this point, we anticipate a recovery will take a firm hold in the third quarter but risks are tilted to the downside. We expect more policy easing in the most affected economies, especially rate cuts.

It’s not yet known how far the new coronavirus (COVID-19) has spread in the region outside China including Hong Kong. Reported cases are clustered in Japan, Korea, Singapore, and Thailand. This could reflect greater capacity in these places to detect and diagnose the virus. Elsewhere in Asia-Pacific, cases may be unreported and could rise, which could change the behavior of consumers and firms and the policy responses of governments. Even if the regional outbreak is contained relative to China’s experience, the economic impact will still be felt.

This article focuses more on economic than viral transmission, and we see four channels: People flows, supply chains, goods trade, and commodity prices in order of importance. The financial sector could be an amplifier but so far markets have taken a benign view. Policymakers are set to provide fiscal support, and central banks have already signaled a bias towards easing. Our revised forecasts for the region assume China’s economy will expand at a coronavirus-dented 5% in 2020.


We estimate that growth will be about 0.5 ppts lower than our previous forecast of 2.2% for 2020. Travel accounts for about 3% of GDP and of that, more than 2% of this is education-related travel, and Chinese students account for about 40% of all enrolments at the tertiary level. In recent years, travel exports have been growing by double-digits in nominal terms, providing an offset to weakness elsewhere in the economy.

The timing of the virus outbreak means that a large number of Chinese students may not be able to start the new academic year and there is some risk that some students may postpone their arrival until a new semester begins. With Chinese visitors of all types accounting directly for about 1% of GDP, a full-year decline in arrivals would exert a material drag on overall growth, compounding the challenges faced by the sector following the recent bushfires (incorporated in this scenario).

The second transmission channel for Australia is lower commodity prices. The fall in iron ore and coal prices since the virus outbreak has been contained, suggesting that markets are pricing in only a temporary shock. If activity in China, especially in the property sector, rebounds later in 2020, prices may rebound and stabilize, blunting the impact on capital expenditure plans of Australian miners. Exchange rate depreciation will help offset some of these effects, and we would expect one additional rate cut from the Reserve Bank of Australia this year (two in total) to bring the cash rate down to 0.25%.

And that’s if you had an inflated 2.3% as your baseline. My base case is still for the shock to linger through Q2 and to hit growth much harder. Long enough that it might set off other another chain of negative events in markets.

David Llewellyn-Smith
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  1. Can’t believe that the ASX is still levitating. What a bunch of morons. Blame it on the algos I suppose but really?
    Defies reality…

    • Also, the big super funds in Australia (e.g. Australian super, Unisuper) are holding a f***load of cash which they don’t even know what to do with. The cash keeps flowing aplenty via the Aussie compulsory superannuation industry enhancement and gifting program. The cash has to go somewhere.

      • I’m somewhat surprised the MB fund still holds shares. But I guess that’s the ratio they have to have.

        On another note…
        Do the sums yourself.

        The mortality stats proclaimed include the sick patients without an outcome.
        There are two clinical outcomes. Recovery or death.

        There are, as of last night
        75207 total cases
        14943 recovered
        2012 dead

        A sensible person would count the known outcomes to get a mortality rate. They wouldn’t include the unknown outcomes (still sick).
        2012 dead / (2012 dead 14943 recovered) * 100 = 11.86%

        The WHO are calculating it by including all cases – period.
        2012 / 75207 *100 = 2.675%

        Does anyone here think that counting the currently sick people is a great way to figure out what’s going on?!

        • Total cases minus (dead + recovered) = remaining cases outlook unknown

          dead / (dead + recovered) as per your sums

          I would tend to say 11% of the remaining cases might follow that break down.

          But I’m not an epidemiologist/infectious diseases expert

          That implies another 6912 dead based on 11.87% x remaining cases 58252

          Does not take into account mortality rate amongst age groups/existing comordities nor profile of remaining cases.

          • There’s a whole list of caveats as to why that number isn’t fantastic for predictions.
            However, it is an accurate snapshot of this present moment.

            * Wuhan is utterly overwhelmed. Care is awful.
            * Wuhan were caught by surprise. Others haven’t been.
            * Treatment does look more effective outside Wuhan.
            * Outside Wuhan has lower numbers overall. Care is good.
            * Treatment options and outcomes may improve over time.

            The worry is that the numbers continue growing. Once there are more critical patients than ICU beds, it looks like it’s game over and that region will follow Wuhan into the mortality abyss.

    • Delirious behaviour in markets is common-place before an almighty crash. In this instance the markets anticipate a huge intervention by central banks — oodles of new money! — and fiscal intervention too — even more money!

      Who knows how this will end but a recession should put a nail in it.

  2. It is unknown how many virus carriers are already in the country. Further it is also unknown how many will enter the country from secondary infections from places other than China. We are very early in this story and the ending has not, as yet been written. The later figures in the table are nothing but guesswork.

  3. Tourism industry hit by $4.5 Billion in losses from the Bush fires. Drought, floods are expected to push this much higher.

    Insurance premiums have doubled for fire affected areas – however storm and flood damage has seen the biggest impact with much more to come, the recent weather events in NSW are not even measured yet.


    This “weather” season, plus coronavirus is shaping up to be a $20 Billion hit to the Australian economy.

    • ANother thought – if China really wanted to export this virus, would be in their best interest to understate the incubation period. Will spread even when they look like they are doing everything required…

  4. Exchange rate depreciation will help offset some of these effects

    Can someone explain to me how collapsed Chinese demand for housing, tourism, accommodation, iron ore and coal will be offset by lower exchange rate ? Do the low prices for iron ore mean that New Zealand will suddenly become a major steel producer ? The Swiss will go red hot for our thermal coal ? Japanese will jump on planes to come and stay in our cheap student accommodation ?

    • It’s a good point, sick of reading about this theoretical none sense. Financial markets can respond to currency instantly but the real economy certainly does not. At the current level all our car production should have magically returned thanks to the magical hand of the free market. A 40% decline in the dollar over the last few years, but where’s the corresponding increase in goods and services exports? Oh it’s increased a little bit but continued to decline in some sectors… sorry but that’s trying to find a correlation not actually a scientific way to make a claim.

      • The low dollar increased export myth is without any doubt, what so ever – the single biggest fallacy in all of modern classic economics – it really is just an absurd joke.

        “Oh hey look at the the US dollar has gone up – I will now have to buy my CPU chips from somewhere else – maybe Fiji – they have a low exchange rate”.

        No – just no no no no no no !

        “Oh wow the Congolese Franc has really gone up – can’t buy my Coltan from them anyone more – but no matter because Monaco just opened up a new mine next to their casino and are flogging real cheap rare earths – BONUS !!”

        No – this is not the modern world. AT ALL.

        Yes – the yen drops and we buy toasters from Korea instead – however demand must be ELASTIC, items MUST be interchangeable, supply chains MUST be inter-operable, shipping, manufacture, production, etc,etc,etc.

        This is particularly salient with services – no – insurance, financials and education can NOT be simply swapped based on currency fluctuations.

        Its just such pathetic, lazy, ignorant economics.

        • Flint, we agree. I’ve been banging this drum for an eternity but it’s fallen on deaf ears. All a lower currency does is flatter GDP because when you’re exporting in USD and you translate that to a lower AUD you end up with a (fake) boost to GDP, but in reality the country just got poorer.

          The way I like to illustrate it is like this:

          One day your A$ is able to buy US$1

          … a few months later your $A is buying US$0.75

          Are you richer or poorer as a result? Modern economics argues you just got richer. WTF?!

      • “Financial markets can respond to currency instantly”
        Isn’t that the point, given the old terminology of the ‘science’ being Political Economy? (the political clase make the rules)
        Capital can flood in at an instant,or over time, with a lower exchange rate and be applied buying …House and Holes ( hard assets) followed by the owners of said capital, en masse.
        That way ‘we’; those who wasted the abundance of opportunity the country provided, get to replace ourselves with a new crop of immigrants who will work to do what we didn’t. Until, of course, they too see that speculating on the price of their past purchases makes them ‘wealthy’ without actually having to work!
        Over time, rinse and repeat, and a lower exchange rate arrives, followed by a new crew to take their turn at exploiting the obvious opportunities.

    • Lower AUD means we outcompete other suppliers of dirt for the Chinese and other markets. And it means each tonne of dirt is more profitable in local terms. So even if there are fewer tonnes being sold in total to China, our local producers can hold on comparatively well. So you don’t see mines here shutting down or people losing jobs.

      So yes the lower currency is a partial offset.

      • Lols – lower currency means more profit.

        Ah huh -thats awesome. You’re awesome. Its like numberwang on roids. Roid-wang.

        And who are those other suppliers ? New Zealand going to suddenly ramp up those railroads and iron ports to start flogging off their huge supplies of dirt ???

        You do realise that there is no one else – and the only competitors there are operate at maxiumum capacity – as do we.

        There aren’t suppliers just sitting around on their thumbs waiting for their chance – it takes a decade to bring a mine online – and if it goes off line then they are screwed – thats the end – they don’t hold them in moth balls.

        Further even those that are operating at lower capacity can not respond to a currency shift in a matter of days, or even weeks – it takes months to ramp up – and even then you MUSt have capacity to do that – and they do not.

        So overall I give you -2/10. Zero out of ten for being so clueless, minus 2 for thinking its profitable for international trade to operate on the same volumes with lower currency – herpa, derpa….

        • No need to be rude.

          You have it backwards.

          Commodities are priced in USD. So if the AUD is weaker against the USD, it means you get more AUD for each tonne of commodity.

          So yes, lower AUD does mean more profit in AUD (or smaller losses, if volumes fall). Because more AUD are coming in.

  5. with enough money printed by banks to buy existing houses from each other we can grow in perpetuity .. who cares even if all economic activity stops, with enough new debt money GDP and ASX will be fine

    • Wow, yes! You may say that in jest.. but finally someone here is starting to understand things.

      And you only need one or two new/non-existing buyers (E.g perhaps someone from China who may be willing to pay whatever price is necessary in order to win) in order to raise the “value” and “prices” of all and any other property in that whole suburb. Not only that, the existing seller of that property (for example a baby boomer) will go to the next suburb and have a greater supply of funds in order to push the prices higher in that entire suburb.

      The tide rises for virtually all the participants. A 10 million dollar median price is certainly achievable in current conditions. First home buyers do not matter, it doesn’t matter if it’s “unaffordable”, the prices can still rise perpetually.. as long as there is a few unusual new entrants that are able to set a new record marginal price (Chineez buyer, kids with parents’ cash, etc)

      One or two people. It’s all that it takes. Forget all the garbage about supply and demand, credit supply etc. It’s all significantly secondary. Actually, I would argue and prove that increased supply in the Australian property market actually increases prices.

      Most of the participants are existing owners of the product and simply trading one for another.. the economics textbook chapters on supply and demand fails this scenario along with with all the “credit creation” analysis garbage.

      • I’m as cynical as any other MBer but no, just one blowout sale to some Chinese guy will not convince banks to lend infinity dollars to all takers to reprice an entire suburb. They’re not completely stupid.

        • Right, which is not what I have said and is redundant in what I’ve illustrated anyway if you can follow what I’ve written. Have a careful read again.

    • A lot of these Chinese conglomerates are in serious strife. HNA has been bankrupt for some time but it is being propped up by ‘the party’. The debt owed by them is vast – it can’t be allowed to fail (or seen to fail). They borrowed huge amounts of money and bought up assets around the world at over-inflated prices. A page right out of the Japanese playbook ahead of their credit bust in the late ’80s. The conglomerates have been ordered to sell their international assets but can’t get anywhere near what they paid for them originally.

      But don’t worry, China isn’t Japan. They’re different. No, really …

  6. China only -0.7%! They must be kidding. They would have lost more than that off the annual growth just in the last month. Are we really going to see a big bounce back? The place is shut down and it seems like a mass exodus of foreigners & capital is underway, not to mention all the importers across the globe looking for alternative countries to manufacture in.
    I guess they can just sell apartments to each other and call that the economy, like we do here.

  7. I have a dream in which the Coronavirus cripples globalisation and Australia returns to its golden age of mid ‘70s to mid ‘80s.

    I’m not sure about the economy during those years but Australia was brimming with confidence and this was evidenced by our culture. Music, movies , sporting achievements….Australia punched well above its weight and the world recognised this and Australians were envied .

    Plus the world’s surfing population was one tenth of its current ridiculous numbers.

    • This is the most important bit of what you just said:
      “Plus the world’s surfing population was one tenth of its current ridiculous numbers.”

      As for the golden era — that was when the debt machine was just getting fired up. Properties weren’t financial assets and debt levels were low. That was the time to get on the Debt Express and ride it to riches.

    • I for one would like to see the return of The Shark with his long golden locks and booming drives with old school wooden woods.

      But not the shocking losses

  8. Iran reported their first 2 cases just today and both died today as well. Plenty under the radar around the world that a) won’t be seeking medical attention unless the symptoms are really bad b) aren’t being tested due to lack of test kits.

    Expect more “new cases” and deaths happening pretty close to each other around the world. Highly unlikely it can be contained now imo.

  9. The coronavirus story is done!
    If you ignore Hubei only a handful of people died. Less than an aeroplane crash.
    The Chinese have been using AI and Big Data to control the coronavirus, so NASDAQ goes up, up and away.
    It doesnt matter if coronavirus spreads to the rest of the world. No one outside of China is dying. Just a couple of days in bed.