Melbourne locks down as Covid-19 returns to Australia

“Coronavirus is holding the economy hostage,” says David Taylor on abc.net.au. Australia has so far been one of the most successful at suppressing the spread of Covid-19, but a new flare-up in Melbourne has forced the country’s second-biggest city into a six-week lockdown.

Melbourne’s Victoria state accounts for 23% of Australian GDP, notes Shane Wright in The Sydney Morning Herald. The latest developments are hampering the recovery from a recession that was already set to be Australia’s worst since the 1930s. A government budget surplus has swiftly turned into the largest deficit on record.

A bit more luck?

The benchmark S&P/ASX 200 index has rallied by 32% since the March low, but remains down 10% on the year. The index is weighted towards the unfashionable financial and commodities sectors.

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However, the price of iron ore has rallied by more than 10% since the start of the year, while gold prices are up 16%. Commodities are “keeping Australia’s luck from running out”, says Clyde Russell in The Sydney Morning Herald. China accounts for two-thirds of the world’s seaborne iron-ore trade, so strong post-lockdown demand from the country’s blast furnaces is welcome. It’s not all good news for commodities: the energy price slump means that earnings from coal and liquefied natural gas (LNG) are likely to take a hit, although they could also enjoy a bounce if a global recovery takes hold.

The commodities bounce is another reminder of Australia’s enormous economic dependence on China. The Middle Kingdom accounts for about one-third of Australian exports, with Chinese consumers buying everything from metals to wine to holidays Down Under, writes Frances Mao for BBC.com. Yet with Beijing growing “more assertive and authoritarian”, Canberra increasingly finds itself caught between its economic interests and geopolitics.

Talk of a coming division of the world into two blocs centred on Washington and Beijing leaves Australia in a tight spot, says Su-Lin Tan for the South China Morning Post. The country hopes to straddle the divide, sticking with the US on security matters and Beijing on the economy, Alan Dupont of consultancy The Cognoscenti Group recently told a parliamentary inquiry. Yet worsening diplomatic relations with Beijing mean it may be forced to choose sides. “The odds favour a partial separation” from China.

Global decoupling and high levels of consumer debt are headwinds for the economy. On a cyclically-adjusted price/earnings ratio of 16.4 the stockmarket is neither strikingly cheap nor expensive. Commodity bulls may wish to investigate further, but there are likely to be better opportunities elsewhere.