Federal Treasurer Josh Frydenberg wants Australians to lower their expectations about the Government’s ability to deliver a budget surplus this year.
It could be a tough ask, given the Government left voters with the very strong impression in the pre-election Budget last April that it had already delivered a surplus.
During his speech last year, Mr Frydenberg said: “Tonight, I announce that the Budget is back in the black and Australia is back on track. For the first time in 12 years, our nation is again paying its own way.
“I am pleased to announce a Budget surplus of $7.1 billion.”
But that surplus may never materialise.
This week Mr Frydenberg warned the economy had been hit by multiple problems in recent months, implying the surplus could be a casualty.
“The Australian economy has been facing a number of economic shocks that have been beyond our control,” he said.
“The trade tensions between the United States and China, the ongoing drought, the fires, the flood and now the impact of the coronavirus.”
When asked if a surplus would be delivered this year, he said that wasn’t his priority.
What do economists say?
This month, the Reserve Bank’s governor Philip Lowe said the outlook for Australia’s economy had been improving before the coronavirus emerged.
Mr Lowe said the virus was having a major impact on Australia’s education sector, its tourism sector, and its imports and exports.
“The number of Chinese tourists coming to Australia has skyrocketed over recent years. They’re the biggest source of foreign tourists to Australia now, and obviously that’s stopped,” he told the Australia-Canada Economic Leadership Forum.
“And we have heard some instances over the last couple of weeks where Chinese companies have called force majeure and have had to interrupt exports to Australia, or imports from Australia.”
ANZ economists Adelaide Timbrell and David Plank said internal ANZ data showed spending at major Australian airports had dropped steeply in recent weeks, thanks to the coronavirus.
They found spending was down 27 per cent between January 21 and February 8, as travel-related bans and a lower appetite for international travel hit hard.
Chinese tourists made up 15 per cent of short-term arrivals in 2019, and a drop in their arrivals accounted for most of this year’s drop in airport sales, they said.
ANZ’s economics team also expects Australia will record a rare decline in quarterly GDP at the start of 2020, amid fallout from the COVID-19 coronavirus and the summer’s bushfires.
“Australia’s GDP is now expected to fall 0.1 per cent in the three months to March as the impact of the coronavirus takes 0.5 percentage points off growth,” they said.
“Any quarterly decline would be the first seen in Australia since 2016.”
Other analysts are warning that even the December quarter — unaffected by coronavirus and the peak of the bushfire crisis — is likely to show weak growth of between 0.2 and 0.4 per cent when the numbers are released by the ABS next week.
Second wave of economic chaos
The coronavirus outbreak is expected to cost the Australian economy billions, with the second-order impact to be felt across supply chains, as many factories remain closed in China.
At least a few economists are saying there’s a slim chance that number could be negative, raising the small risk that Australia is in a recession right now.
Making matters worse, the unemployment rate has been rising over the last 12 months.
The seasonally adjusted unemployment rate has risen from 4.9 per cent to 5.3 per cent since February last year. In trend terms, which smooths out seasonal variations, the unemployment rate has risen from 5.1 per cent to 5.2 per cent.
The RBA recently named a consistent increase in the unemployment rate as the most likely trigger for another interest rate cut. The cash rate is already an historically low 0.75 per cent.
$6b hit to national income
Deloitte Access Economics partner Chris Richardson said COVID-19 was a major health crisis globally — but said fear of the virus was having the biggest economic impact.
He said the fear was inflicting three kinds of economic pain. Borders are closing, so tourism in Australia is taking a big hit; foreign student numbers are dropping noticeably; and commodity prices are taking a hit because Chinese factory shutdowns mean China’s construction sector is not using as much steel.
The economic fallout globally from the coronavirus will be far worse than SARS now that China is so critical to the global, and especially Australian, economy, writes Ian Verrender.
Mr Richardson added that the Government thankfully still had some fiscal wiggle room because Treasury had kept its budget assumptions very conservative.
In its mid-year Budget update in December, Treasury kept its assumption that iron ore prices would decline towards $US55 a tonne by the end of the June quarter 2020. At the moment, iron ore is still $US85 a tonne.
Mr Richardson said that conservative assumption had bought the Government some fiscal space, but the Commonwealth is now having to spend billions of dollars in response to various economic shocks.
For instance, the Government had to put aside $2 billion for a bushfire relief fund, and the coronavirus could end up costing the budget billions more than expected.
Mr Richardson said he had originally thought the virus would cost the budget $1.8 billion, but that figure has jumped considerably.
“As of today, where we stand, we’re looking at a hit to the Australian economy, to national income, for the first six months of 2020 of about $6 billion,” he told the ABC.
“That’s a pretty nasty hit to national income, but it’s not something that moves us into recession.”
In the 2019-20 Budget (handed down in April), Treasury forecast the Morrison Government would deliver a $7.1 billion surplus over the next 12 months.
By December, when the numbers were updated, that estimated surplus had declined to $5 billion.
That was before the summer’s fires had turned catastrophic, and before the coronavirus had spread as far.
Economic data remains mixed
Earlier this month, RBA governor Philip Lowe said we could not neglect the impact of the drought, fires and climate change on Australia’s economy.
“We’ve got a drought that’s detracting this year a quarter of a percentage point from GDP as it has for the last couple of years,” he said.
“The fires probably across the December and March quarters detract 0.2 percentage points from GDP.
“Climate change is affecting the nature of production in Australia, the nature of investment, ultimately the nature of our exports. At the moment, I think it’s affecting confidence of people and therefore, ultimately, spending.”
But he also insisted other economic data was positive.
“Our resource sector is in upswing again,” he said.
“We’ve gone through a cycle in the residential construction sector, which is playing out, and last year households were quite cautious. They were fixing their balance sheets in a period in which house prices were declining.
“House prices are now rising. Households are feeling a bit more comfortable and they’re going to spend a bit more.”
But that was before Australia’s chief medical officer Brendan Murphy said this week that Australia was preparing for the World Health Organisation to declare the coronavirus outbreak a pandemic.
So, the surplus may be gone, but that could be the least of our worries if a coronavirus pandemic does hit our shores.
More on the coronavirus outbreak:
- Coronavirus has ruined thousands of holidays. Should you cancel your travel plans?
- As a coronavirus pandemic looms, experts say now’s the time to get ready
- The coronavirus emergency plan has been activated. Here’s what that means for you
- The WHO has declared a global emergency for just the sixth time
- What exactly is coronavirus, and should you be concerned?