'We will recover': The coronavirus is set to push Australia towards the edge of recession, but Treasury believes we can avoid the worst

Coronavirus is pushing the Australian economy to the edge of recession. (Photo by Fred Marie, Corbis via Getty Images)
  • The Australian Treasury has revealed its analysis of the coronavirus’ economic impact.
  • Noting the bushfires will already wipe 0.2% off the country’s growth, Treasury Secretary Steven Kennedy said the coronavirus increases the “risk of a prolonged downturn.”
  • However, the Treasury was quick to reassure the Senate it was not forecasting a recession, despite how bad some of the projections look.
  • Visit Business Insider Australia’s homepage for more stories.

Treasury insists Australia isn’t heading for a recession.

Acknowledging national growth has been “solid” given headwinds, Treasury Secretary Steven Kennedy told a senate committee on Thursday consecutive crises had put the economy at risk since the government provided its last forecasts back in December.

“Two key events have arisen since MYEFO that materially affect our assessment of the economy – this summer’s bushfires and the emergence of COVID-19,” Kennedy said in his opening address.

The first of those burnt some 12.7 million hectares of land and is expected to wipe 0.2% of GDP growth from the December and March quarters. To put that figure in perspective, the economy grew just 0.5% in the last quarter, just 2.5 times higher than what the bushfires threaten.

“The negative economic impacts will primarily be as a result of lower household consumption and tourism in combination with other effects on the agriculture and forestry sectors,” Kennedy said. “Household consumption is expected to be lower both as a result of the direct impact on affected regions, as well as from the impact of widespread smoke haze across major east coast cities.”

However, with Australia’s bushfires largely now under control, it’s the still uncontained coronavirus that is worrying Treasury.

“The global economic impacts of COVID-19 are continuing to emerge but there is little doubt that they are serious,” Kennedy said. “The scale of the economic impact on Australia and the world will depend on a number of factors. The extent to which the virus spreads, how quickly it spreads, disruptions to ports and seaborne freight, and should COVID-19 become more prevalent in Australia, the direct impact it has on domestic economic activity.”

Treasury did not quantify the GDP percentage the coronavirus could shave off. However, given the slim growth that is now expected during the March and June quarters – both of which the coronavirus will likely affect – it could be enough to push Australia into consecutive periods of negative growth, a technical recession.

“The economic impact of COVID-19 is likely to be deeper, wider, and longer when compared with SARS,” Kennedy said. “It will create more risk of a prolonged downturn and fiscal support will be needed to accelerate the recovery of the economy, especially once the health and health management effects of COVID-19 begin to fade.”

Given coronavirus hurts both the demand and supply side of the economy, Treasury indicated it will largely be up to the government to assist the “businesses and sectors most affect by it”.

“The Australian economy is very well placed to respond to this shock,” Kennedy reassured.

The optimism was backed up Macroeconomic Group deputy secretary Meghan Quinn who said, “at the moment we are not forecasting a recession for the Australian economy.”

Can Australia really avoid a shrinking economy?

While Australia’s bean counters are publicly upbeat, they’re likely more worried than they let on.

The RBA estimates that if tourism and education is reduced by one-tenth, the coronavirus will wipe 0.5% off the March quarter. Combined with bushfire damage, there’s a clear danger the Australian economy will contract, according to the Commonwealth Bank.

“CBA already had reduced its GDP estimate for the first quarter to 0.1% – initially was 0.6% – due to the coronavirus and bushfire impacts,” senior economist Belinda Allen said in a note issued to Business Insider Australia. “There are clear downside risks to this number. A negative first quarter print is a distinct possibility.”

PricewaterhouseCoopers (PwC) expects Australia’s pain could be further protracted. According to modelling provided to Business Insider Australia, the coronavirus will wipe 1.32% off Australia’s GDP this year, or $34.2 billion. For comparison’s sake, the GFC wiped more than 5% off global growth.

Given its reliance on importing consumer goods and exporting raw materials, Australia has more to lose than other nations, the consultancy company notes. If its figures are correct, we could well see another contraction June, confirming a technical recession – Australia’s first since 1991.

With 0.5% growth previously forecast for June by CBA, there is some wiggle room if the coronavirus’ impact is contained. However, as CBA notes, those numbers are subject to revision “given this is a rapidly developing situation”.

So despite all that doom and gloom, a recession, if it manifests, could also be short lived. Economists expect the second half of 2020 to provide stronger growth, and the coronavirus hopefully dealt with by then.

If not, Australia’s world-beating 29 years of growth could be about to end.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.