A Record-Breaking Economic Boom Is About to Go Bust
June 03 2020 - 5:16AM
Dow Jones News
By James Glynn and Alice Uribe
SYDNEY--The developed world's longest ongoing economic expansion
is approaching its expiration date.
Australia's 28-year growth streak survived a regional economic
crisis in the 1990s, a global economic crisis in the 2000s, and a
boom-bust cycle in its core commodity sector in the 2010s. Now, a
recession looms after the economy contracted in the first three
months of the year, as catastrophic bush fires and restrictions to
slow the spread of the new coronavirus took a heavy toll.
Australia's gross domestic product contracted by 0.3% in the
first three months of this year from the previous quarter, its
first quarterly fall since 2011. Economists expect a steeper drop
in activity in the three months through June when swaths of
commerce shut down and travel largely collapsed as authorities
aggressively tightened coronavirus measures.
On Wednesday, Treasurer Josh Frydenberg said the country was now
in recession. "That is on the basis of advice that I have from the
Treasury Department on where the June quarter is expected to be,"
he said. Australia's definition of a recession is two consecutive
quarters of negative growth.
In response to the pandemic, Prime Minister Scott Morrison and
Mr. Frydenberg rolled out the biggest fiscal stimulus package by an
Australian government, including a wage subsidy worth US$48.3
billion to keep more than 1.5 million workers in jobs. Still, more
than 600,000 jobs were lost in April alone. The government expects
the virus to drive a contraction in GDP of about 10% from peak to
trough.
A key question for Australia's leaders is how quickly to
withdraw the government help as national infection rates of
Covid-19 fall to about 10 a day, enabling many restrictions to be
loosened sooner than expected.
Data already suggest a bumpy economic recovery featuring a broad
range of winners and losers. Mining companies that dig up iron ore,
Australia's biggest export, have benefited from rising prices due
to supply disruptions in Brazil and firming Chinese demand. In
contrast, other key industries including tourism and education for
foreign students remain stifled by closed national borders.
Australia's trade relationship with China is also fraying as
Beijing's economy is recovering, worrying business leaders. China
buys more than a quarter of everything Australia sells to the
world. Two-way trade with Beijing last year was worth about $152
billion, a record, say trade officials.
Australia's call for an investigation into whether any missteps
early in the coronavirus crisis contributed to the pandemic has
angered Beijing.
China's ambassador to the country, Cheng Jingye, retaliated by
threatening a consumer boycott of Australian beef and wine, and of
visits to Australia by Chinese students and tourists.
Despite the trade spat, Australia's central bank this week said
the depth of the economic downturn could be less than what was
earlier expected as restrictions ease. It cut interest rates to a
record-low 0.25% earlier this year and began buying government
bonds, pledging to keep those measures in place until the job
market improves and inflation picks up.
Su-Lin Ong, an economist at RBC Capital Markets, said the speed
of recovery will hinge on whether Australia's government extends
its stimulus program and how consumers behave in the aftermath of
the coronavirus, such as whether they choose to save more. Ms. Ong
expects Australia's economy to return to a modest pace of growth,
starting later this year.
"The worst, including for the labor market, is likely behind us
but the path ahead remains uncertain," Ms. Ong said.
Tomas Rhodes, a 26-year-old British expatriate, illustrates why
consumption might not snap back quickly. After leaving a part-time
job in a fitness studio in Sydney's beachfront suburbs just before
the coronavirus was declared a global pandemic, he recently found
work in a bike shop. His girlfriend is also working, but the cost
of living remains high.
"We're still going into our savings," Mr. Rhodes said.
Write to James Glynn at james.glynn@wsj.com
(END) Dow Jones Newswires
June 03, 2020 05:01 ET (09:01 GMT)
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