Australia’s triple challenge: Droughts, fires, and viruses

By Giles Coghlan, Chief Currency Analyst at HYCM

The financial impact

Governor Lowe is optimistic that the Australian economy can bounce back from the drought and the fires. That does hold up as the drop in farm output and consumption should be met by the reconstruction and recovery work that will take place shortly. However, the coronavirus outbreak sits, according to Alexandra Heath (Head of Economic Analysis at the Reserve Bank), in a ‘different league’ to the bushfire shock.

How long will the coronavirus linger?

Heath said that there is a difficulty not knowing how long the disruption will last and the latest economic forecasts only include first-round effects from travel disruptions known at the time. The downside risks to the forecasts, as Heath points out, is that they haven’t really taken into account the fact that China sits in the middle of a lot of supply chains. Heath says that:

‘It’s starting to look a lot like the disruptions and these sort of supply chain spillovers are going to be a lot more serious than what we have’.

Furthermore, The current barring of flights from China into Australia is only going to be a further drag on the education and tourism sector. Remember, tourism is Australia’s second-largest export earner. RBA interest rates are at record lows of 0.75% and factors are lining up for a weak 2020, Australian 10 year bonds are likely to remain bid in this environment and the longer the coronavirus drags on with containment and disruption issues the more it will eat away at Australia’s economy which has around 30% of its GDP from trade with China.

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