After two months of almost complete shutdown as part of the Chinese authorities’ efforts to contain the Coronavirus epidemic, factories across China are gradually reopening, trucks are crawling back onto the road, and some ports are again operating at near-full capacity.
But economists and supply chain managers warn that this recovery may have come too late to save Australia, China’s largest trading partner, from sliding into its first recession since 1991.
To get a better picture of the economic mauling that Australia will potentially face in the months ahead, we need to understand the extent of the impact of the crisis in China on local businesses and industries.
Why is the Australian Economy Particularly at Risk?
Quite simply, China is Australia’s largest trading partner by a wide margin. Because of its reliance on exporting raw materials to, and importing consumer goods from, China, Australia has more to lose than other countries.
And when its supply chains are ravaged by lockdowns, quarantines, and transport restrictions, Australia cannot hope to avoid paying some sort of price. But the multi-billion-dollar question is, how high a price will it have to pay?
The Predictions are Dire
Analysts, supply chain specialists, economists, and politicians have been expressing varying opinions on what they believe will be the economic fallout of the epidemic. But the Australian stock market fall of more than six percent on Monday, March 9, sparked dire predictions of what lies in store.
McIntyre predicts that Australia’s gross domestic product will fall 0.4 percentage point in the first quarter of 2020 and 0.3 percentage point in the second, plunging the economy into recession after a 28.5 year stretch of economic growth.
Evans writes that he expects the economy will contract by 0.3 percent in both the first and second quarters of 2020. But, he says, this will be followed by a rebound of 1.4 percent and 0.8 percent respectively in the third and fourth quarters.
McKibbin, who did ground-breaking work when he examined the impact of the 2003 SARS epidemic, says if COVID-19 goes global it could carve about 2 percent from Australian growth, but if it becomes more lethal, Australia’s GDP would plunge 7.9 percent in the first year.
Hunter says the blow to exports and the supply chain disruptions caused by COVID-19, coupled with the devastation caused by major bushfires in the summer, will likely see March quarter contraction. “The risk of a recession has increased materially,” she writes.
The Australian Government’s Take on the Epidemic
Treasury Secretary Steven Kennedy has acknowledged that the economic impact of COVID-19 “is likely to be deeper, wider, and longer when compared with SARS”. He was referring to the 2003 Severe Acute Respiratory Syndrome which was estimated to have wiped US$40 billion off the global economy. Kennedy added that COVID-19 will create “more risk of a prolonged downturn”.
Why is COVID-19 Causing so Much Disruption to Australia’s Economy?
Bilateral trade between China and Australia amounts to $194.6 billion (AUD), or 24.4 percent of the country’s total bilateral trade, in the fiscal year 2017-2018. Any disruption, therefore, affects both ends of the supply chain.
Australia’s imports from China are dominated by telecommunications equipment, IT products, homeware, and furniture.
Australia’s exports to China are led by coal, iron ore and natural gas, and include agricultural products, especially beef, and seafood, predominantly lobsters and shrimps.
What Caused the Stress on the China-Australia Supply Chain?
When Chinese authorities on January 23 quarantined the city of Wuhan, where the virus originated, and other impacted cities, factories closed and production ground to a halt.
Compounding the supply chain problem was the imposition of severe travel restrictions which impacted the flow of goods to and from Hubei province, of which Wuhan is the capital.
On top of that, the Australian government decided to impose a 14-day quarantine on vessels leaving mainland China effective from February 1. The supply chain only just managed to hold together by the weakest of links.
What is the Current Situation on the Ground in China?
While it is difficult to get a clear picture of how, or even if, China is starting to recover and rebuild, government figures indicate that the number of infections is decreasing and that quarantines are being lifted.
In its latest update, global logistics company Agility, headquartered in the Middle East, reports the following developments on the ground in China:
- Truck drivers are resuming duty and road restrictions are being partially lifted.
- Inbound and outbound air freight capacity is still under pressure.
- Work has largely resumed across China, with production estimated at 60-70 percent of normal.
- Quarantine periods are ending, enabling the workforce to return.
- Quarantine and restrictions remain in place for anyone returning from Hubei Province.
- During the last week of February, a sharp increase in production took place in most provinces.
- Airports are operating smoothly without any major backlogs.
- A significant number of flight cancellations has affected inbound and outbound capacity.
Despite the Chinese economy apparently stuttering slowly back to normal, the damage has been done and enormous backlogs need to be tackled.
Mother Nature: An Unmanageable Supply Chain Element
With no vaccine against the virus expected to be in production anytime soon, and with some patients who had recovered from the infection later testing positive again, still too little is known to predict which way COVID-19 will go.
For now, however, the expectation is that the Australian economy will dip until Q2 and then rebound again in the third or fourth quarter.
By then the Australia-China supply chain is expected to be back to near-full strength, with both partners, however, having learned a painful lesson about the risks of over-dependence on each other—and received a stark reminder that no economy is stronger than the natural forces at work in our world.