What is the impact of the Coronavirus on Australia's economy?

17 March 2020 Consultancy.com.au

The Coronavirus, known as Covid-19, is having a significant negative impact on the global economy. A new study outlines the details on the impact on Australia's national economy for the mid- and long-term.

The study, produced by economists at consulting firm KPMG, has found that, in the absence of the Commonwealth Government’s stimulus package, the Covid-19 pandemic would reduce Australia’s GDP in 2020 by about 0.9 per cent. These impacts would amount to a hit to Australia’s GDP of more than $17 billion by the end of 2020.

In 2021 a partial rebound of around $12 billion is expected, but it could take subsequent years up to the remainder of the decade for GDP to return to the levels forecast prior to the onset of this pandemic.

The initial impact of the Coronavirus is felt on the supply side of the economy. Productivity is adversely affected as an unusually large number of workers are voluntarily or involuntarily absent from their workplaces. This can disrupt supply chains as businesses stop production or operate at below normal capacity.

Deviation in Base Case GDP Under COVID-19 Scenario

However, as time progresses and already can be seen in practice, the supply-side shock then turns into a demand side shock. Businesses that are unable to operate at capacity reduce their demand for inputs and may experience difficulties meeting their obligations as cash flows dry up. Consumers change their spending patterns, reducing expenditures on travel, entertainment, tourism and other discretionary items.

Uncertainty about the duration of the Coronavirus and intensity of the economic impact can lead to further rounds of negative demand shocks as consumers increase their saving rates as a precaution against lost income, while businesses tighten up on cash flow management and defer investment decisions.

Model assumptions

The firm has used various factors currently known about the virus and its disruptive tendencies to create a model of economic disruption. According to the co-authors Brendan Rynne, Michael Malakellis, Craig Emerson and George Verikios, the model reflects balance in its calculations, refraining from portraying the worst-case scenario and remaining grounded in apparent trends across the globe.

As explained, “The scenario does not assume widespread panic among populations but does assume people will be reluctant to travel in groups of strangers and to gather at large events such as sporting and cultural events. Further, the scenario does not assume the widespread closure by authorities of institutions such as schools, universities and aged care facilities. This, too, might change.”

The outlook might look grim, but the experts highlight the presence of a number of behavioural factors in the model, which are susceptible to significant change in response to changes in the virus’ progression. These predictive behavioural factors are drawn from analysis of trends during prior influenza outbreaks.

Selected components of GDP

As a result, the actual economic damage could end up being significantly lower or higher than KPMG’s predictions, depending on the course that the virus takes in the near future. Mitigating factors include the government’s latest nearly $18 billion stimulus package, which KPMG regards as effectively structured.

“History suggest that the most effective stimulus packages developed by governments to an economic shock are ones that correctly identify the underlying economic symptoms and respond with targeted policies aimed at specifically treating those problems. We have analysed the Australian Government stimulus package and consider it is a comprehensive and timely package,” write the authors.

More specific reports of economic damage from the virus have been emerging steadily in recent weeks. At a relatively early stage of the virus’ progression when China remained the epicentre, PwC calculated $2 billion of economic damage to Australia’s education and tourism sectors as the flow of people from China reduced. Recent reports have also detailed potential problems for Australia’s energy sector.

About the Coronavirus

The Coronavirus leads to symptoms including fevers, coughs, shortness of breath, aches, sore throat and vomiting, which seem to appear between two and 14 days after being exposed to the virus. As a respiratory illness, the severity for patients has to date ranged from a mild cold in the younger population to very severe symptoms that can lead to death, especially among the frail and aged.

At the time of writing, the number of Corona cases worldwide stands at 200,000, with some 6,000 deaths.


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