Professor Salvatore Babones has published a new paper for the Centre for Independent Studies (CIS) estimating the likely impact of the COVID-19 virus (coronavirus) on Australia’s export earnings.
Babones estimates that Australia will lose between $8 billion and $12 billion in export earnings, equivalent to roughly 0.4% to 0.6% of GDP, with Australia’s services export industries hardest hit. However, this estimate assumes the crisis is over by June 2020.
Below is the Executive Summary of the report, along with key charts and tables:
China’s 2020 coronavirus epidemic is first and foremost a human tragedy, but it also has economic ramifications, both for China and for its trading partners. Few countries depend on the China market to such an extent as Australia. In 2019, Australia exported $157 billion in goods and an estimated $18 billion in services to China (including Hong Kong and Macau). Australia’s $175 billion total exports to China constituted 37.5% of all exports and 9.3% of Australia’s GDP. If the coronavirus epidemic results in major reductions in Chinese purchases of Australian goods and services, the impact on the overall Australian economy could be substantial. The effects could be especially pronounced in particular industries that are highly vulnerable to a disruption in the Chinese market.
This paper estimates the direct and immediate effects of the coronavirus epidemic on the revenues of Australia’s major export industries. It breaks down Australia’s exports to China by major industry group, estimates the China concentration of each industry’s exports, and evaluates the risk of market disruption for each industry. Of 18 major export industries (9 in goods and 9 in services), the epidemic poses a high risk of disruption for four industries and a medium risk of disruption for four industries.
Industries at high risk of disruption from coronavirus are:
• Passenger transport
• Business travel
• Education services
Industries at medium risk of disruption from coronavirus are:
• Freight transport
• Financial services
• Management consulting
Assuming that the coronavirus epidemic is over by June, 2020, the total cost to Australia in lost export revenues is likely to fall between $8 billion and $12 billion, or roughly 0.4% to 0.6% of GDP. This is not an estimate of the loss to GDP, which may be larger. The total effect of an event like the coronavirus on GDP is contingent on many factors and would require much more detailed modeling than is undertaken in this paper.
In the lower-impact scenario of the effects of the coronavirus on Australia’s export industries, lost revenues will be concentrated in service industries like education and tourism, which are almost certain to be severely affected by the epidemic. In the higher impact scenario, minerals export losses could become substantial as well. Due to the enormous scale of Australia’s minerals exports to China, even small percentage disruptions would cause large absolute reductions in export revenues.
However, Australia’s miners are accustomed to managing risk and have well-developed tools for minimising its effects; such as forward contracts, commodities futures, and credit insurance. They also tend to hold substantial financial reserves. Although they may suffer losses due to the coronavirus epidemic, they are well-prepared for such a contingency. Moreover, any losses they suffer are almost certain to be borne by private investors, and are unlikely to result in calls for a taxpayer-funded bailout.
In contrast, Australia’s highly-exposed service industries have few tools for managing risk, little experience in using those tools, and close links to the government. Their financial reserves are relatively small. These factors combine to generate serious moral hazards in some (though not all) service export industries. Among all Australian export industries, the only one for which the coronavirus epidemic poses a systemic risk is the university sector. Chinese enrolments at Australia’s higher education institutions have risen six-fold since 2002, without a corresponding increase in risk preparedness. Some Australian universities may suffer serious uninsured revenue reductions as a result of the coronavirus epidemic.
The coronavirus epidemic has also highlighted the need for all services exporters to keep greater reserves and/or purchase business disruption insurance to insure against low-probability, high impact events like this year’s coronavirus epidemic.
The full report is available for download here.