What is the coronavirus?
The coronavirus (COVID-19) was first reported from the Wuhan province in China on 31 December 2019. Since then, there have been 125,048 confirmed cases and 4,613 deaths globally. COVID-19 has spread to many countries around the world. However, the main countries effected is China, South Korea, Iran, Japan and Italy. As of yesterday (12 March 2020), the World Health Organisation declared COVID-19 a pandemic.
How has COVID-19 effect the Australian economy?
The economic impact COVID-19 will have a significant impact on the Australian and global economy. Firstly, in terms of the Australian economy, COVID-19 is creating a supply shock for Australian businesses. A supply shock in economic terms is the sudden increase or decrease of supply for commodities, goods, and services. In the case for COVID-19, this is creating a supply shock where supply of consumer and industrial goods is decreasing (particularly from China). This is not the same economic situation in Australia during the Global Financial Crisis (GFC). The GFC mainly caused a demand shock to the Australian economy rather than a supply shock.
Secondly, COVID-19 will affect business productivity in the short-term. Several Australian wide businesses have been, and will continue to, ask employees to work from home until COVID-19 is contained. Not only will this reduce productivity, it may reduce the likelihood of business hiring more employees in the short, which will decease economic activity.
Thirdly, domestic consumption should be adversely affected by COVID-19. Currently, Australia has been relatively sheltered from COVID-19 compared with other developed economics. However, fear may stop consumers wanting to buy goods and services, with the goal to increase savings due to short-term economic uncertainty.
Finally, Australian financial markets have officially entered into a bear market. A bear market is where the market drops 20% or more from its peak. The Australian equities is down around 28% from its peak (13 March 2020). This large drop is mainly caused by investors fearing the uncertainty around the economic and social impacts COVID-19 will have in Australia and globally. The upheaval in financial markets may have significant implications for liquidity in the Australian and global markets. Early signs of this is that National Australian Bank Ltd (ASX: NAB) and Macquarie Group Ltd (ASX: MQG) have both cancelled a capital raising by issuing capital notes.
What is the Monetary policy response?
On 3 March 2020, the RBA Board decided to reduce the cash rate by 25 basis points from 0.75% to 0.50%. The RBA’s rationale for this policy decision is in response to the global coronavirus outbreak. The coronavirus outbreak is expected to slow global economic growth over at least the short term. The coronavirus outbreak is having a significant effect on the Australian economy, and the effects are most prevalent in education and travel sectors. The RBA has mentioned that domestic spending is likely to be considerably weaker in the March quarter 2020, and possibly the quarters following.
This easing of monetary policy should allow for further liquidity into the financial sector (specifically the banks). However, easing in monetary policy is unlikely to increase domestic consumer economic activity due to the heightened concern around the economic and social effects of COVID-19. The RBA could ease monetary policy further by either or both reducing the cash rate again and possibly quantitative easing which will be a first for Australia.
What is the fiscal policy response?
The Government announced yesterday (12 March 2020) a A$17.6 billion economic stimulus package directed at preventing the Australian economy from entering a recession in the June quarter 2020 for the first time in nearly 30 years. The key initiatives from this package include a tax relief for small businesses, a one-off cash payment for welfare recipients and additional funding to trade business to keep apprentices and trades in work. This stimulus plan mainly aims at keeping Australian small to medium sized business afloat, and for these businesses to retain their workers.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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