UBS slashes Australian growth to negative on virus hit

Via the excellent George Tharenou at UBS:

Coronavirus is material for Australia, with Chinese exports worth 8.8% of GDP
The coronavirus outbreak has seen UBS downgrade its global GDP outlook. Indeed, among the most (indirectly) exposed economies are Australia & NZ, given China is by far their largest trading partner. Australian exports to China have grown significantly, by ~20% y/y for decades. In 2003 when SARS hit, export values were only $11bn, or 7% share of total exports, worth just 1% of annual GDP. But in 2019, exports to China hit a record ~$175bn, or ~35% share of total exports, worth ~8.8% of GDP. This is far above most other major economies at a 1-3% share of GDP.

UBS expects ~30% drop in services exports to China; Q1 GDP now -0.1% q/q
Across a few months during SARS in 2003, total Australian exports values (to all countries) fell ~13%, with services -8%, & a likely larger fall for exports to China (albeit perhaps partly also dragged down by the Iraq war). Indeed, the number of total visitor arrivals (from all countries) dropped by 16% in just 3 months to mid-2003; while arrivals from China collapsed by 38%. UBS China’s economics team expects a 30% slump in China’s total outbound travel in 2020, with the Q1 contraction more severe. So a 30% fall for Australian services exports to China wipes $6bn from GDP, or 0.9% off annual growth, a plausible downside risk scenario. Given Australian q/q GDP has been rising by only ~$2½bn q/q, we now think Q1 GDP growth is likely to be negative, even with arguably still optimistic assumptions. 1) We assume a decline in total exports in Q1 of 2% q/q, driven by a ~30% q/q slump in Chinese services exports, with little decline elsewhere. 2) We allow for some offsetting boost to GDP in Q2 from ‘deferred’ arrivals lifting growth, albeit this is relatively small given most services are ‘lost activity’: you don’t take two holidays to make up for a cancelled one; and many of the 134k Chinese temporary students who miss the start of semester may not return in Q2. 3) We also include some offset from lower imports as Australians substitute overseas for domestic holidays, but there will still likely also be a hit to domestic demand as virus fears simply lead Australians to go out less than otherwise. 4) We assume no negative hit to Australian goods exports to China (or any country), or other supply disruptions.

UBS downgrades Q1 GDP (again) to -0.1% & 1.5% y/y; still downside risk
Overall, we downgrade our Q1 GDP forecast (again) to -0.1% q/q & 1.5% y/y (was 0.2%, 1.8%), the weakest since the GFC. Given the impact of coronavirus is worse than SARS, we still have downside risk & Q1 could be ~-0.5% q/q. We also cut 2020E to 1.7% y/y (was 1.9%), probably below consensus; with 2021E unrevised at 2.5%. Our Q4-20 forecast of 1.9% is far below the RBA’s rebound to 2.7% (& 3% in 2021).

Some sanity at last. The danger is that the hit to Chinese steel implicit in those real estate numbers is material enough that a terms of trade shock lands in Q2 as well setting us up for two quarters of negative growth.

That is, recession.

Meanwhile, iron ore and the Australian dollar run higher…

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. Don’t worry, they’ll open the gates soon, just after the viruse goes global:

    “Clearly the other, less attractive option would be if there were spread of the virus to many countries and we had widespread transmission in the form of a global pandemic and then travel bans probably don’t add any value in those circumstances.” – Chief Medical Officer Brendan Murphy

    So, is he saying that they’ll lift the bans if this all goes pear-shaped…?

  2. Gotta love a free trade agreement that basically means things are only produced in the lowest cost country, meaning in Australia we import almost everything.
    If countries think oil is important to survival, wouldn’t you think access to the basic food assentials is the same

  3. John Howards Bowling Coach

    I think there is a Black Swan sized fly in the ointment this time around.

    Normally they would just open the gates and flood in more punters, all the while stopping the boats…

    BUT COVID19 and other factors such as the Indians, Chinese and other recent arrivals having no idea or empathy about how to deal with a bushfire crisis, has rapidly lead to more heavy suspicion in the wider community about the benefit to the local population of migration.

    I feel that there is a slight uptick in the questioning from the media now, albeit we still have the SBS and ABC breaking their arm to point the finger at anyone offensive. But that aside, we might be closer to the tipping point where it becomes an issue that people are willing to talk about in polite company.

    That then become a disaster for the ALP/LNP as more migrants is their only play for pump priming this economy. Without it they’d need to resort to something radical such as reversing the foreign investment trend to bring in and retain money created in Australia for instance. I don’t think there is actually anyone in Canberra (or Sussex/Spring St) who actually has a plan for what could be done to fund Australia without the flood of 3rd worlders, lining up to become long term tax avoiders in the land of milk&honey

      • John Howards Bowling Coach

        Agreed. It should have been put in already, including a tax on coal, gas, oil etc. When the ALP backed off it showed no backbone. All it takes is for the government to spend on the media (they are usually happy to do that) with a simple message to the punters to explain that very few people in Australia are employed in that highly profitable and largely foreign owned industry, which if not taxed will continue to send all the profits offshore meaning Australia receives almost nothing for giving up our national resources.

        Believe it or not the message is quite simple, and when the average punter understands that almost no jobs are at risk, and Australia gets soo little from our resources extracted by foreign and locally owned companies, they will vote for whoever takes action in the best interests of the country. Given the political donations involved, it’s of course a stacked deck, BUT!

        • Yes – exactly. It’s one of those many, many policies that we need but that can now only be implemented AFTER a shocking crisis which wrecks us and shows people that real change is needed. And even then it will take courage.

      • The Traveling Wilbur

        Increasing tax on superfund earnings and contributions would be more likely to get through parliament than that. And if that failed, what would still be more likely? A super super profits tax. LOL.

  4. Just wait until this hits Indonesia, India and Bangladesh (it is likely already there but no one is testing for it).
    Those countries have no substantial means of controlling for it other than perhaps lettering the warmer weather just do its thing. Once this gets underway in those three spots well it will be very challenging for this government to keep borders open at all IMO.