The coronavirus outbreak may further hurt an economy already suffering from bushfires and drought, the governor of the Reserve Bank says.
In a speech to the National Press Club in Sydney, Philip Lowe said the RBA was closely monitoring the economic effect of the epidemic, which has killed more than 490 people.
He said the effect of the coronavirus outbreak on the Australian economy could be worse than that of the 2003 Sars epidemic because “China is a larger part of the global economy and it is more closely integrated, including with Australia”.
Sectors including tourism and education are likely to suffer billions of dollars worth of damage if the Morrison government keeps travel bans in place for more than six months, while the price of another key export to China, iron ore, has fallen by more than 10% in a month.
The RBA expects the ongoing drought to cut 0.25 percentage points from growth this year.
Lowe said the economic impact on bushfire areas was “very large” due to the “large-scale destruction of homes, farms and businesses as well as public infrastructure”.
He said that, taking into account the expected rebuilding effort, government grants and insurance payouts, the fires would not affect economic growth across the whole year.
However, the fires would cut economic growth by about 0.2 percentage points in the December quarter and the current quarter.
Lowe said that despite the disasters, the economy was going through “a gentle turning point for the better”, predicting modest increases in growth and consumer spending over the coming two years.
He also defended the bank’s decision to cut official interest rates to a historic low of 0.75% against charges that it has spooked consumers into closing their wallets.
Instead, Australians were adapting to a period of consistently low wages growth, high household debt and a fall in home prices by paying down their mortgages instead of going to the shops, he said.
In a report released on Wednesday, Deloitte Access Economics partner Stephen Smith said the RBA’s series of cuts to interest rates meant that “many consumers and businesses now believe that the economy and its prospects are worse than they actually are”.
He said uncertainty about energy policy was also limiting investment in electricity infrastructure.
“Overall, although private business investment is forecast to grow through the course of 2020, the pace of those gains is now set to be more modest than previously expected,” he said.
Tourism sector takes a hit
Simon Westaway, the executive director of the Australian Tourism Industry Council, said his body was working on an estimate of the “significant” hit the sector would take from the ban on Chinese nationals entering Australia.
“It’s going to run into the many hundreds of millions of dollars,” he said.
He said the government had given industry no guidance on whether the ban would be extended when it expires on 15 February.
“Industry’s not confident we’re going to see flights return any time soon but we’ve got to be constructive and we are being constructive behind the scenes.”
The government’s flight ban on Saturday followed China’s decision last week to stop group travel, which makes up about a quarter of the Australian market.
Westaway said tour operators in areas popular with Chinese groups, including the Great Ocean Road and the Yarra Valley in Victoria, and the Gold Coast and Cairns in Queensland, were already feeling the effect of cancelled bookings.
Passenger numbers decline
Of airports in Australia and New Zealand, the flight ban will hit Melbourne’s the hardest, according to ratings agency S&P.
“The coronavirus crisis, sluggish economic conditions across Asia-Pacific, and the impact of the Australian bushfires will dent growth in passenger traffic to ANZ [Australia and New Zealand] airports,” analyst Parvathy Iyer said.
In a report issued on Wednesday, Iyer said that because Chinese traffic makes up 16% of airport business in Australia and New Zealand, international visitor numbers may fall.
“Further, the full impact of the Australian bushfires has yet to play out,” she said.
“Regional communities and small businesses are severely affected, and travel warnings issued by some countries over December-January will crimp passenger numbers.”
Casino earnings expected to fall
S&P says James Packer’s Crown Resorts operations are also set to take a hit from coronavirus – although its controversial suitor, Hong Kong’s Melco, is likely to fare worse.
“We believe the coronavirus will likely reduce both VIP and mass-market visitation to Crown Resorts’s properties in Australia,” the agency said.
“However, it is still too early to quantify the outbreak’s eventual effect on the company’s earnings given Australia’s still-strong domestic economy and our view that it has a smaller cash flow exposure to the outbreak than the firms operating in Macau and Singapore.”
These include Melco, which runs casinos in the former Portuguese colony of Macau, and is currently embroiled in controversy over its attempts to buy 20% of Crown that are to be examined at public hearings in NSW.
S&P said Melco “has limited flexibility to absorb a prolonged and severe decline in its cash flow” because it needs money to build an expansion to its Studio City casino in Macau.
Up to $8bn drop in education income
The International Education Association of Australia estimates that if Chinese students aren’t able to enrol for the next six months it will cost the industry between $6bn and $8bn.
A spokesman said the ITEA was working on a better estimate and should have one ready in advance of a meeting of a meeting of a global reputation taskforce set up by education minister Dan Tehan last month to deal with the effects of the bushfires.
The tertiary education sector is expecting “significant impact”, the Independent Tertiary Education Council Australia said.
It said 13,604 Chinese residents were estimated to be enrolled in Australian vocational education and training, with 10,935 of them already in the country and 2,669 holding a valid student visa but marooned abroad.
Mining companies exposed
The price of Australia’s most important export to China, iron ore, fell 11% in January due to the virus outbreak, ratings agency Moody’s said.
Australia exports more than $60bn a year worth of iron ore to China, and the industry is a major source of tax revenue.
According to Moody’s, mining magnate Andrew “Twiggy” Forrest’s Fortescue Metals is the Australian miner most exposed to a downturn in China because it makes 93% of its sales there.
But the two big Anglo-Australian miners, BHP and Rio Tinto, are also heavily exposed, selling 55% and 45% respectively to China.