Australia has gone over the coronavirus cliff, says Katharine Murphy in The Guardian. A surge in new cases has prodded the government into action, with Prime Minister Scott Morrison shutting down non-essential services such as cinemas and gyms this week.
The sudden stop to large swathes of the consumer economy has weighed on the stockmarket. The benchmark S&P/ASX 200 is down almost one-third over the past month. The Reserve Bank of Australia, the country’s central bank, has stepped in with emergency monetary support, slashing interest rates to a record low of 0.25% and launching open-ended quantitative easing. Canberra has already announced a A$17.6bn (£8.9bn) relief package, equivalent to about 1% of GDP, with more to follow.
The move to a stricter lockdown is already generating signs of economic distress, report Colin Packham and Kate Lamb for Reuters. Long queues have been forming outside the offices of the country’s main welfare agency. Westpac’s economists forecast that the “extraordinary measures” could see unemployment spike above 11%.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Record household debt
The “chief concern” now is that the closure of so many businesses could trigger a “wave of bankruptcies” and soaring unemployment, says Jamie Smyth for the Financial Times. Australia’s high consumer debt levels leave it particularly vulnerable.
The country’s long housing boom has left many households with enormous monthly repayments, mainly in the form of mortgages. In a country where the household debt-to-income ratio is almost 200% – “one of the highest levels in the world” – many will struggle to keep their heads above water.
Higher headline unemployment figures will only capture part of the economic hit, says Jason Murphy on news.com.au. Underemployment is a long-running structural problem in Australia, with many workers reporting that they would like to work extra hours that are not available. The issue is especially acute in accommodation and catering, sectors that are likely to be the hardest hit by the Covid-19 shutdown.
Betting the house on China
It is thus little wonder that consumer confidence has plummeted to historic lows, says Shane Wright in The Sydney Morning Herald.
The ANZ/Roy Morgan weekly measure of consumer sentiment is now 17% below the bottom reached during the global financial crisis. The gauge hasn’t been this low since the early 1990s, the last time the economy shrank.
Things are likely to get a lot uglier, says Malcolm Scott on Bloomberg. Goldman Sachs is now forecasting “the sharpest annual GDP contraction since the great depression”. The economy looks set to shrink by 6% this year, thanks largely to a collapse in “social” consumption at hotels, restaurants and cafes.
A close economic relationship with China was a key reason why Australia dodged the 2008 recession, but this time around that strength looks like another vulnerability, says Michael Heath on Bloomberg. The coronavirus crisis has “exposed the extraordinary depth of Australia’s economic dependence on China”.
About one-third of the country’s exports go to the Middle Kingdom, making it the developed world’s most “China-reliant economy”. Chinese nationals account for 15% of tourists and 38% of foreign students.
Australian miners of coal and iron ore have been feeling the pain from factory closures in the world’s second-biggest economy.
Covid-19 looks set to do what the dotcom bust, global financial crisis, house slump and raging wildfires all couldn’t: end Australia’s record streak of 28 years without a recession, says The Economist.
From boom to bust
The only question now is how severe the downturn will be. Australia went into the 2008 crisis with strong employment and a central bank with room to cut rates, says Murphy. No such luck this time.
The “lucky country’s” long recession-free streak has obscured key problems in the Australian economy, above all unsustainable levels of household debt based on overpriced houses.
Investors should also note that the ASX/S&P 200 is weighted towards financials and commodities, two sectors where particular caution is warranted.
As the global economy plunges and Australian house prices return to earth, Australians may ruefully reflect that they didn’t really dodge the global post-2008 credit and housing reckoning after all. They merely dela
-
Water companies blocked from using customer money to pay “undeserved” bonusesThe regulator has blocked three water companies from using billpayer money to pay £1.5 million in exec bonuses
-
Will the Bitcoin price hit $100,000?With Bitcoin prices trading just below $100,000, we explore whether the cryptocurrency can hit the milestone.
-
UK wages grow at a record paceThe latest UK wages data will add pressure on the BoE to push interest rates even higher.
-
Trapped in a time of zombie governmentIt’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
-
America is in deep denial over debtThe downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
-
UK economy avoids stagnation with surprise growthGross domestic product increased by 0.2% in the second quarter and by 0.5% in June
-
Bank of England raises interest rates to 5.25%The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
-
UK wage growth hits a record highStubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
-
UK inflation remains at 8.7% ‒ what it means for your moneyInflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
-
VICE bankruptcy: how did it happen?Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
