Australia — Business sentiment sours with export outlook
By the end of March, two thirds of Australian businesses reported that their turnover or cash flow had reduced as a result of COVID-19. Indeed, both business conditions and confidence recorded their largest falls on record in March, as companies prepare for an economic downturn of ‘unprecedented speed and magnitude’. Yet exporters were the first Australian businesses to feel the ill effects of the COVID-19 pandemic, and many will be the last to recover. The pandemic is disrupting Australia’s export performance in three important ways. First, via lower demand in major export markets amid factory closures and weaker consumer spending. Second, port closures inhibiting market access. Last, supply chain disruptions caused by lower production of intermediate inputs in countries like China and Korea. Further, the deferral of business investment will weigh on future export potential, particularly in the resources sector.
Overall, the World Trade Organisation forecasts international trade will fall between 12% and 32% this year. But services—which accounted for a fifth of Australia’s total exports last year—are likely to be the hardest hit sector. Indeed, service exports recorded their largest monthly decline (excluding the 2000 Sydney Olympics) in February, down 9.7% to A$7.9 billion. Visitors arriving in Australia for short term education were down 40% in February compared to a year ago, while holiday-goers were down 35%. With travel restrictions tightened significantly in March, further falls are expected.
Resources exports (excluding volatile non-monetary gold) fell 6% in the first two months of the year, driven by weather-related falls in iron ore volumes. However, preliminary ABS data suggests a large increase in the value of iron ore exports to China in March. Assuming China avoids a second wave of COVID-19, the outlook for Australia’s largest export is relatively favourable. Iron ore prices have been surprisingly resilient throughout the COVID-19 pandemic amid robust demand from Chinese construction and real estate sectors and multiple supply disruptions. Given China’s import requirements reportedly amount to about 1.1 billion tonnes per year, against just 100 million for Europe, early signs of China’s economic recovery are encouraging. Though this early recovery will be tested by the global economy’s expected subdued performance in the second half of the year. Other resources exports have performed well; for instance, metals exports surged in January and February amid increased demand for safe-haven assets like gold.
Manufacturing and agriculture exports have thus far been relatively resilient (Chart), though performance has varied widely by industry. Those industries reliant on discretionary consumer spending are likely to see continued pressure.
