COVID-19 is making a rate cut in March substantially more likely and a recession could be on its way, according to AMP Capital.
Australia is likely to see negative GDP growth of 0.1 per cent this quarter due to the impact of the bushfires and the hit from the coronavirus, with Australia’s economic reliance on China proving to be the decisive factor.
“Exports to China make up nearly 9 per cent of Australia’s GDP including hard commodities at nearly 5 per cent, tourism at 0.2 per cent and education at 0.6 per cent,” said AMP Capital chief economist Shane Oliver.
“For other major countries it’s less than 3 per cent. Chinese tourist arrivals stopped with the travel ban, education is under threat although there is a bit more time and bulk commodity shipments are showing signs of being impacted (although this has been distorted by storms).”
And while AMP Capital’s base case is still for a rebound in the June quarter, there are still risks.
“Clearly the longer it drags on and the more the outbreak and disruption [spread] globally the bigger the impact on Australia including the risk of two negative quarters, i.e. recession,” Mr Oliver said.
“The rising threat to the Australian economy from coronavirus is adding to the likelihood that the RBA will cut rates in March or April and the pressure for more fiscal stimulus in the May budget is increasing.”
Some estimates suggest that 50 per cent of China’s economy has been locked down for the last three weeks, which could mean almost 12 per cent knocked off GDP for this quarter. While there have been efforts to restore economic activity outside high-risk areas, coal consumption, steel demand, and property sales remain below normal levels.
“Against this background share markets, commodity prices and the [Australian dollar] remain at high risk of more downside in the short term, but assuming some containment and a growth rebound in the June quarter markets should rebound by then,” Mr Oliver said.
“Easier than otherwise monetary and fiscal policies – with ever more stimulus measures announced in China and more monetary and fiscal easing globally – would add to this.”