Australia's Bushfires Are Extinguished, But Its Economy Burns

Updated: Jun 27, 2020

by Vedika Bhagat

The economic blow that came in the form of the outbreak of the novel coronavirus in 2020 has led to catastrophic effects on countries across the world, triggering extreme turbulence in financial markets.

So much so that Australia, a country often associated with abundant resources, iron-ore deposits, and flourishing wildlife, has hit its first recession in nearly three decades. It does seem as though the virus has managed to hit all “shores”.

The A $2 trillion economy contracted by 0.3% over a span of three months ending March 2020. Its gross domestic product (GDP) fell last quarter as business sectors shut down to combat Covid-19.

Furthermore, the Australian economy was tepid even before the virus hit it, due to the bushfires that destroyed Australian homes worth at least $5 billion, along with weak wage growth dampening consumer spending.

The GDP of Australia is likely to plummet by 9% in the second quarter, according to Ben Udy, an economist for Australia & New Zealand at Capital Economics.

Although the official second-quarter figures have not yet been officially released, Australia’s treasurer, Josh Frydenberg, confirmed on the 3rd of June that their GDP will shrink in the May-June period, putting all speculations to rest.

According to Frydenberg, by closing off their borders, they dodged an economic “Armageddon”.

Indeed, they have not been hit as badly as other countries (China, USA, Brazil), but they are facing two consecutive quarters of contraction nonetheless - thereby living through their first recession since 1990.

Despite government officials claiming that the hit taken by Australia has been smaller than that of other countries, the recent figures show that GDP per capita fell even in 2019.

The story behind this supposedly “lucky” economy is threefold - net exports, household spending, investment in fixed capital, and government expenditure.

Australia mainly exports natural resources - like iron ore, coal, and gas - to Asian countries such as China, Japan, and Korea that are currently facing economic headwinds due to the virus as well.

This is likely to lead to a decline in the demand for Australian exports, leading to a possible trade deficit and a decrease in GDP.

However, the government fails to take into account Australia’s dependence on China due to the positive impact the 2008 Chinese stimulus had on Australia’s real GDP.

The disturbing factor here is that China has been hit hard, which could lead to a huge decline in the GDP of Australia. The graph below depicts how Chinese investments in Australia have been declining over the years as well.

The continued reduction of Chinese investments in Australia reflects a myriad of factors, including a change in Chinese policies and increased demand for outbound investment in high value‐added sectors to emphasize on expertise and high‐quality brands and products that can support China’s industrial upgrading and meet the evolving demands of Chinese middle-class consumers.

Furthermore, Canberra’s call for an inquiry into the origins of the coronavirus has strained the Australian-Chinese relationship with Beijing accusing the government of a “political campaign against China”. This has led to the severing of ties between the two countries.

This slowdown has been amplified by the domestic disruptions from the outbreak. The biggest blow to the economy came in the form of a massive drop in consumption in household spending, which, in recent years, has accounted for over 50% of Australia’s GDP.

Additionally, the virus has taken a huge toll on the tourism industry, which has been a driving force behind Australia’s economic success for many years.

Whether the industry will be able to bounce back to its former glory in the coming years is dubious, and this may have a disastrous long-term effect on consumer spending and household incomes in Australia.

Despite announcing a stimulus package in March which includes spending $17.6 billion (accounting for 0.9% of their GDP), the treasurer recently said government spending should be cut-down in the second half of the year, as “there is no money tree” to keep supporting workers or businesses.

If the government spends less money, why should private businesses choose to invest in factories or their workers?

Due to a shrinking economy, it is improbable that businesses will be able to afford to keep these activities going, which includes payment of wages to the workers. I believe this will worsen the already-impaired employment situation in Australia.

More than 1 million people have lost their jobs over the past six weeks and unemployment is expected to double to 10% by the end of June, according to government forecasts.

The sector that has particularly taken a hit is the service sector, with numerous lay-offs that cannot easily be reinstated. This is the reason why the Australian economy needs a targeted and permanent stimulus to curb the issue of unemployment.

The Government's most recent figures show that more than 1.6 million Australians are on JobSeeker, which means that they are relying on the government to maintain their employment status.

% of Jobs Lost in Each Sector

The government plans to discontinue using JobSeeker in September. In my opinion, it will eventually see the unemployment rates skyrocketing.

The Australian government has been trying to take measures but said measures are of little avail. In a bid to boost weak employment and inflation data and to increase the disposable income of households under debts, the Reserve Bank of Australia slashed interest rates to a record low of 0.75%.

In March, the Central Bank decreased its lending rates and began to buy bonds to increase the money supply in the economy. Though these measures have been a tad bit helpful, they have failed to resolve the mortgage debt problems faced by workers who are losing out on jobs.

Despite everything that is going on at the moment, one cannot deny that Australia’s economy was once supremely successful.

Dubbed the “lucky country”, they were the world’s economic hero, managing a record three decades of uninterrupted economic growth.

Even the global economic crisis of 2008 failed to shake the resilient Australian economy. They were the global economy’s glowing poster-child, the pride, and envy of the International Monetary Fund (IMF). However, it seems as though that phase is now over for them.

Now the big question is as follows: what will happen in the September quarter? Will Australia bounce back out of recession?

This will demand a smooth reopening of the economy, huge spending by the government, and confident consumer spending. I believe this won’t happen unless state governments speed up the relaxation of their restrictions including opening up their borders and simultaneously ensuring that they are not hit by a second wave of the virus.

Despite the focus on mining and manufacturing, Australia’s economy is overwhelmingly dominated by services. If the government wants to stop this recession from turning into a depression, it will have to redirect its policy playbook toward services and extend JobKeeper to provide continued assistance.


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