2020 — Australian exports fall amid global economic recession

The COVID-19 pandemic prompted governments around the world to implement significant restrictions on mobility (Chart). This caused severe demand destruction and disruption to global supply chains in the first half of the year. At the aggregate level, both advanced and emerging economies fell into recession for the first time since World War II. A slump in domestic demand caused China’s GDP to contract 6.8% year-over-year in Q1—the first annual decline in four decades. COVID-19 exacerbated existing economic vulnerabilities in India and Sri Lanka and prompted a downturn in the previously fast-growing Philippines economy. India, Spain and the UK, among many other countries, suffered their largest GDP declines on record.

Global merchandise trade sank in the first half of 2020. Falling commodity prices, particularly energy prices, reduced export receipts across the world’s mining and energy producers. International travel restrictions disproportionately hurt services trade, such as tourism and education. Tourism-dependent Pacific Islands and Southeast Asian markets were hit particularly hard. Rising unemployment heightened consumers’ caution and weighed on demand for consumer goods.

Tightening in financing conditions heightened debt and liquidity risks in emerging markets

Tighter financing conditions, including lower access to and rising cost of US dollar financing, amplified the initial economic shock in emerging markets. Amid waning global risk appetite, emerging markets, including Sri Lanka, South Africa and Indonesia, suffered weakening currencies and sharp capital outflows (Chart). Foreign exchange shortages worsened in some countries. Weaker remittances reduced a crucial source of external financing for many vulnerable governments and households in emerging markets. Rapid debt accumulation over many years and large external financing needs made it increasingly difficult for many governments to refinance their debt obligations. Multilateral and bilateral lenders extended debt relief for lower income countries.

Global trade mends as economies reopen, led by Asia

Since mid-year, the global economy began a slow recovery as many countries tentatively reopened from lockdowns. The relatively successful control of COVID-19, earlier re-openings and supply chain partnerships with China helped Asia lead the global revival. China’s swift recovery, led by the industrial sector (Chart), lifted resources demand and world trade. Trade was also buffeted by growing external demand for medical supplies and equipment to support remote working. Supported by rising exports, Taiwan and Vietnam are among the few Asian economies, along with China, that are likely to avoid a fall in GDP in 2020. Export-manufacturing-led recoveries are also underway in Singapore and South Korea.

Aggressive policy stimulus supports economic recovery

Exceptional policy stimulus—including aggressive fiscal and monetary easing—helped foster the global economic recovery. Fiscal support measures are estimated to total US$12 trillion globally in 2020 (about 14% of global GDP and equivalent to the size of economies of Japan, Germany and India combined) (Chart). Governments accelerated investment, particularly on infrastructure.

Monetary policy eased dramatically through interest rate cuts, liquidity injections, and asset purchases. Central banks moved swiftly to ensure the continued flow of credit to the real economy and limit financing strains. In general, equity prices have rebounded, credit spreads have narrowed, portfolio flows to emerging markets have stabilised, and currencies that sharply depreciated have strengthened. Still, exuberance in financial markets remains at odds with trends in the real economy.

In some countries, structural reforms will make it easier to do business and enhance export potential. If effectively implemented, those reforms could sustain the economic recovery. A landmark ‘omnibus law’ in Indonesia aims to remove bureaucratic and regulatory obstacles to investment, address labour market rigidities, and use tax reform to incentivise investment. Japan’s new prime minister has pledged to continue “Abenomics” policies, including liberalising the agriculture sector, increasing immigration and raising female workforce participation. Once the COVID-19 shock passes, Pakistan remains committed to progressing reforms to boost foreign exchange reserves and broaden the tax base.

However, rising geopolitical tensions and social unrest soured investor sentiment in countries such as Hong Kong, Thailand, Iran and Lebanon and added to the challenges facing businesses in 2020. The EU and UK missed several soft deadlines to conclude a trade deal. Job losses in high-contact and non-teleworkable industries had a disproportionate negative impact on low income earners and informal sector workers and contributed to worsening poverty.

Despite resilience in iron ore, Australian exports suffer from global woes

Australian exports entered the COVID-19 crisis already reeling from devastating bushfires and drought that had weakened agriculture and tourism exports. Exporters have since suffered from the global recession (Chart); total exports fell almost 8% in Q3 2020 compared to Q3 2019, driven by a broad-based decline in the rural, manufacturing and services sectors.

That is despite rising exports of metal ores and minerals—predominately iron ore—up 4% on a year-ago basis in Q3 2020. Iron ore export receipts topped more than $100 billion in 2019-20, a record high, supported by supply issues in Brazil and robust industrial demand from China. China’s fiscal stimulus of CNY3.75 trillion (about 4% of 2019 GDP) is similar in level to the stimulus provided for infrastructure spending during the 2008-09 global financial crisis. Strength in metal ores exports has been particularly important during a sustained period of low international travel and external headwinds for consumption exports.

Protracted pandemic casts a long shadow

Given the pandemic is spreading and accelerating in many places, some countries have slowed reopening and some are reinstating national lockdowns. In particular, Europe’s second wave threatens a double-dip recession. Overall, the IMF estimates a 4.2% contraction in world GDP in 2020—the first decline since 2009 and the deepest contraction since the Great Depression.