Kochie’s Market Update: The economic impact of Coronavirus

market-update-March-5

“May you live in interesting times” is a traditional Chinese curse. When you consider the origin of the  Coronavirus and the financial ructions it is causing around the world, the curse has a lot of modern day significance.

In investment circles, Coronavirus is a “black swan” event… something absolutely no-one saw coming.

There is no doubt it will have significant economic and financial impact on Australia. Speaking with the Treasurer Josh Frydenberg yesterday, he was indicating the International Monetary Fund and our Federal Treasury are currently estimating the Coronavirus will cut economic growth by 0.5 per cent.

Next week the Treasurer will unveil a stimulus package to help the economy and support the Reserve Bank’s 0.25 per cent cut in official interest rates this week. The Federal Government needs to deliver the correct stimulus response … just as the Rudd Government did at the start of the GFC. Now before you get angry with that comment, history shows (and been acknowledged by the likes of the London-based Economist magazine) it was one of the best responses to the GFC and ensured we were one of the few countries in the world to escape a Recession.

But, amidst all the panic (and the weird run on toilet paper… go figure!) this time round we’re in a good position to respond;

. our Government debt as a proportion of the size of the economy, is one of the lowest in the world. In other words, we can afford to borrow (at these historically low levels of interest rates) to spark economic activity.

. the Federal budget is roughly in balance. While it’s good for a country to live within its means, and surpluses are nice to have, when times are tough running a budget deficit is prudent… it keeps people in jobs, it keeps businesses solvent and it hopefully protects average Australians from financial hardship. The emotional and financial cost of a recession to families can be devastating… and you don’t wish that on anyone.

So the economy is in for some big challenges as a result of the Coronavirus but the Australian economy is in pretty good shape to fight back.

The economy grew last year at a faster rate than the Doomsayers predicted

As I’ve said before, this is the most hated period of prosperity in this country’s history. Despite all the negativity we’re continuing our 29 consecutive years of positive economic growth. 

And, as it turns out, 2019 was better than most experts thought.

The Australian economy grew by 0.5 per cent in the December quarter (consensus of experts: 0.3-0.5 per cent) after an upwardly-revised 0.6 per cent increase in the September quarter. 

So the economy grew 2.2 per cent over the year to December.

The biggest contributions to growth came from household consumption, ownership transfer costs and inventories (all +0.2 percentage points); followed by government consumption and net exports (both +0.1pp). Detracting from growth was dwelling and non-dwelling (commercial) investment  (both -0.2pp).

“The gloomsters will be disappointed – again,” concluded my Sunrise mate, Craig James from Commsec.

“The record economic expansion continues, despite the impact from the horrific bushfires  late in the year. But the risk of a coronavirus-driven ‘technical recession’ is very real. By that, we mean the economy risks going backwards in the March and June quarters. That outcome is by no means certain, but it is a risk. To prevent this, what is required is a boost to economy-wide spending, especially from April to June.”

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