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Chief economist update: Border brawl

Forget Australia's simmering political and trade tension with China, there's one building right inside our very borders.

Canberra's worried that Beijing's ban on beef imports, increased tariff on barley could extend to boycott of Australia's education and tourism sectors.

For sure and for certain, this would have negative implications for the Australian economy - China being our premier customer - but we have to get our own house in order first.

Recent headlines report of Australia's State Premiers' disagreement over re-opening state borders. Those that have recorded minimal or no new cases of infections in recent weeks -- South Australia, Western Australia and Northern Territory and Queensland - want to keep their borders shuttered; those with the most number of infections - New South Wales and Victoria - did not close their borders (nothing to lose I guess).

Broadly, this spat boils down to what every government around the world is weighing - return to economic normality or risking a second wave of infections and deaths that would again cripple business activity through the re-imposition of social distancing and lockdown measures.

Latest data from the Australian Bureau of Statistics (ABS) and the CBA-Markit Economics surveys underscore the disastrous impact of restrictions has had on the Australian economy.

The ABS reports that after surging by 8.5% in the month of March - due to hoarding (of toilet papers) - retail sales (based on its preliminary estimate) dropped by 17.9% in the month of April.

"Cafes, restaurants and takeaway food services, clothing, footwear and personal accessory retailing, and department stores fell heavily in April and there were no offsetting rises in the other industries. Turnover in clothing, footwear and personal accessory retailing, and cafes, restaurants and takeaways is around half the level of April 2019."

That's the household side of the equation.

Businesses are also none too enthusiastic.

The latest Commonwealth Bank Flash Composite PMI survey for May indicated continued decline in business activity despite gradual easing of social restrictions during the month.

The composite PMI improved to a preliminary estimate of 26.4 in May from the record low reading of 22.4 in the previous month (although with 50 marking the delineation between expansion and contraction, it remains deep in contraction territory). Same with the services PMI - which "improved" to a reading of 25.5 from 19.5 in April) but the manufacturing sector plumbed new record depths (down to 42.8 in May from 44.1 in April).

But all's not lost.

Commenting on the Commonwealth Bank Flash PMI data, CBA Head of Australian Economics, Gareth Aird noted that, "May should mark the low point in the PMIs and we would expect activity to lift from here on a monthly basis. Company views on the economic outlook have improved and the lift in confidence is welcome".

Easing border tensions at home and with China would go a long way into making Mr. Aird's prognosis become a reality.

Read our full COVID-19 news coverage and analysis here.

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