Chief economist update: COVID-19 could hit Australia with triple whammy

The same way as a computer virus freezes the computer's operating system, the coronavirus - renamed COVID-19 - has forced China into lockdown and slowed, if not completely frozen, economic activity in the country.

But even without the government-mandated lockdown, consumers are staying home on their own volition for fear of being infected. This would dramatically impact revenues of restaurants, hotels, retail stores, transportation, etc...and if the virus is not contained soon, job losses.

But even without the government-mandated lockdown, workers would prefer to stay home for fear of being infected. Chinese businesses have reportedly cut back on production and trade ... and if the virus is not contained soon, job losses.

For sure and for certain, this would take a toll on China's already slowing economy. The magnitude of the hit on Chinese GDP depends on how quickly (or not) COVID-19 is contained.

The magnitude of the hit on Chinese GDP will determine the extent of the slowdown (temporary or otherwise) in the rest of the world.

Recall the increase in financial market anxiety whenever China's actual stats come in lower than expectations, or at the height of the US-China trade war?  This is because China now accounts for around 17% of the global economy - more than four times the 4% during the SARS - for which the current epidemic is being compared - outbreak in 2003.

Further, China is now much more interconnected with the rest of the world.

As The Economist writes: "Its manufacturers have also become enmeshed in supply chains of mind-boggling complexity. A factory in Wuhan may provide parts to a firm elsewhere in China, which in turn supplies a factory in Stuttgart, with the final product emerging in Michigan."

The fall-out is underscored by a report by The Guardian: "JCB, the British digger maker, has cut working hours and suspended overtime for 4,000 UK employees after the coronavirus outbreak prompted a shortage in parts coming from China."

"So far 24 airlines have cancelled flights to and from China. They include British Airways, Air France, and Dutch airline KLM, which axed flights through much of March. In the US, American Airlines and Delta halted flights until the end of April, as did the Spanish flag carrier Iberia.

"Asian and Middle Eastern airlines were also heavily affected. Emirates and Etihad are among at least 16 to scrap some routes to China.

"Makers of products for Chinese consumers have also taken a hit, with shops and entertainment venues across the country closed by quarantine conditions."

Australia would be hit by a triple whammy.

The anticipated weakening in the Chinese economy, plus the recent Morrison government's ban on Chinese nationals and on people who have travelled to China, would negatively impact Australia's external trade account. China is the country's top export market - accounting for around 33% of Australia's total exports.

Australia's exports account would also suffer from the drop in commodity prices hit by the slowing China growth outlook.

China is also Australia's top source of imports - 20.4% of total - consisting mainly, engineering products, including office and telecommunication equipment and parts, computers, household appliances and furniture, among others.

Australian wholesalers and retailers of these products would have to source their goods elsewhere (and perhaps, at a higher price) while businesses using Chinese parts and materials as inputs would need to stop production until Chinese production resumes ... and the system reboots.

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