Australia’s Rough Week Shows Risks of First Recession Since 1991

(Bloomberg) --

Australia’s proximity to the trade lanes of Asia have long been both a strategic advantage and an Achilles heel, and lately it’s been feeling more like the latter.

The country’s record-long expansion is at risk and the central bank is one interest-rate cut away from having to deploy unconventional policy if it wants to give more support to the embattled economy. A little over five years ago this economic rock star had a currency near parity with the dollar and one of the highest developed-market interest rates.

What changed? Not a lot. It’s mainly just the swings and roundabouts of being among the most China-exposed economies in the world.

Fallout from China’s coronavirus drove the Reserve Bank of Australia to resume rate cuts this week after having earlier argued they weren’t yet necessary. It also has the government scrambling to assemble a fiscal package after repeatedly resisting calls for stimulus as it hoped for a return to a budget surplus.

The RBA and Treasury have told lawmakers that the hit to international tourism and education alone would cut first-quarter GDP by at least 0.5%. That’s before supply-chain disruptions and broader economic impacts are taken into account.

This follows wildfires that devastated the nation’s drought-stricken east coast. The blazes shaved a few tenths of a percentage point from GDP and had already discouraged Chinese tourists from visiting, suggesting a contraction this quarter is all but certain.

Treasury insisted Thursday it’s not forecasting a recession — under the standard definition of two straight quarters of contraction — but the risk of a downturn Down Under looks more and more real.

About a third of Australia’s exports — from education to tourism to agriculture and natural resources like iron ore — go to China; and Chinese nationals make up roughly 38% of foreign students and 15% of tourists.

Data released Thursday showed exports to China slumped 18% month-on-month in January, though in fairness this is a traditionally weak period. Retail sales declined for a second straight month, recording the biggest back-to-back decline since 2010, as smoke-filled Sydney and Melbourne discouraged outdoor dining and the wildfires scared off visitors. And that was before the onslaught of coronavirus.

The Australian economy has been remarkably resilient, skirting recessions since 1991. It will take quite a feat to avoid that outcome in the coronavirus crisis of 2020.

Charting the Trade War

China’s trade likely plunged in January and February on the combined effects of the extended Lunar New Year holiday and the worsening coronavirus outbreak, highlighting the impact on supply chains that continues to ripple through the global economy. Exports and imports are forecast to have slumped in the period, with shipments out of China dropping by about a fifth, according to a Bloomberg survey. The release on Saturday will be the first time the government has combined the data for the first two months of the year, an attempt to smooth out the usual volatility from the Lunar New Year break.

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• March 7: China trade balance
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• March 16: EU trade chief Phil Hogan speaks in Washington

To contact the editor responsible for this story: Brendan Murray at brmurray@bloomberg.net, Zoe Schneeweiss

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