Australia: is the “lucky country” no longer lucky?

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It is strangely quiet on the observation deck of Scenic World, one of Australia’s most popular tourist attractions nestled high in the Blue Mountains. Tourists normally chat enthusiastically in several languages ​​while waiting to board cable cars that slide down the Jamison Valley, offering breathtaking views of the sandstone rock formations and the temperate rain forest. But since the introduction of social distancing rules on March 23, the family business has closed and has been forced to lay off 180 employees.

“When we had a global financial crisis in 2008, Sars or the attacks of September 11, 2001, they suppressed certain segments of our market, but this pandemic destroyed everything”, explains David Hammon, director of Hammons Holdings, which exploited Scenic World. in New South Wales for 75 years. “It was one of the few times when our family had to close the business completely.”

Scenic World is one of thousands of tourism businesses that have closed in an industry that contributed Australian $ 61 billion ($ 40 billion) to the Australian economy last year. A third of people working in accommodation and food services have already lost their jobs due to the government’s policy of “hibernating” businesses after the coronavirus epidemic. And even if Canberra begins to lift elements of its lockdown, after successfully reducing the rate of new infections to just a handful per day, some companies will find it hard to reopen as travel bans threaten to kill demand for months , or even years to come.

Australia – nicknamed the “lucky country” – has produced a record of uninterrupted uninterrupted economic growth among developed countries. But economists predict the pandemic will do what no crisis has done in three decades: plunging the Australian economy into recession.

The additional complication for Australia is that the recession is hitting as relations with China – a key commodity export market over the past decade – deteriorate, limiting its ability to escape the recession.

David Hammon:

David Hammon: “This pandemic has destroyed everything” © Jamie Smyth / FT

More than a million people have lost their jobs in the past six weeks and unemployment is expected to double to 10% by the end of June, according to government forecasts. International migration, which includes students and skilled and temporary workers – a key driver of growth – has stopped and investment in housing is expected to fall 9.6% in 2020. Overall, the Australian economy by $ 2 billion of Australian dollars is expected to decrease by 10%. cent in the second quarter, ushering in a recession which should be officially declared in the economic figures published in September

Australia has entered the crisis better than most developed countries with a net debt to gross domestic product ratio of less than 20%, which has enabled it to free up AU $ 200 billion in direct financial support for businesses and workers in vacations. But a decade-long surge in house prices has left many people chained to costly mortgages. Household debt-to-income ratio stands at over 200%, one of the highest levels in the developed world, and constitutes a major vulnerability as the nation faces its worst economic crisis in nearly of a century.

Annotated graph showing that the coronavirus is about to end Australia's three decades of growth. Annual percentage change in GDP, 1990 to 2020

Diplomatic relations with China, Australia’s largest trading partner with bilateral trade worth $ 235 billion between the end of June 2019, fell to the trough of the modern era following the call for Canberra to an independent investigation into the origins of the coronavirus, which was first detected in the Chinese city of Wuhan. Beijing responded by accusing the Conservative government of teaming up with Washington in “a political campaign against China”. He removed an import ban on beef and imposed punitive tariffs on barley.

“Australia is very dependent on China and has benefited enormously, after the world financial crisis of 2008, from the revival of Beijing which pushed up the prices of raw materials”, explains Saul Eslake, economist and stock exchange at the university from Tasmania. “We will not get the momentum this time and we may even suffer an economic backlash. “

Warning signs ask the public to stay outside an observation area at Echo Point in Katoomba

Warning signs ask the public to stay outside an observation area at Echo Point in Katoomba © Getty Images

Intervention cost

The scale of the challenge that Australia faces is immense. When the coronavirus started spreading in late January, the country was fighting hundreds of bush fires, which killed 34 people, destroyed thousands of homes and cost at least A $ 5 billion. The disaster, which followed a debilitating three-year drought, left deep psychological scars in the affected communities. It has also undermined public confidence in Scott Morrison, the Australian Prime Minister, although his management of the pandemic has helped his approval ratings recover.

A few weeks after putting out the forest fires, authorities faced a new threat when Covid-19 started to spread rapidly in early March. The federal and state governments have closed borders, closed large swathes of the economy, and put in place effective test and trace systems. So far, the health response has proven to be effective, with just over 100 reported deaths and a total number of cases limited to around 7,000.

But the decisive health intervention had a high economic cost. A generation of workers with no experience of mass unemployment has either lost their job or been put on leave by their employer. Young people are the hardest hit, with almost one in five of those under 20 being laid off. The economic carnage would be worse if it weren’t for a $ 70 billion Australian government-funded “Jobkeeper program,” which pays the wages of more than 3.5 million workers on leave – a quarter of a hand – of work of the country – until the end of September.

“This whole experience was very stressful,” said Racheal Wellman, who lost his job in a Melbourne cafe when social distancing was introduced in March. It has taken almost three weeks to fill out her claim and so far, her efforts to find another job have failed, leaving her in a very precarious financial situation.

“I had to borrow money from my parents and a friend just to have enough money to eat,” said the 23-year-old. “I have never felt so ashamed in my life. “

Bar chart showing household debt in developed countries as% of net disposable income (2019) showing that Australian households are among the most indebted

The Australian economy last experienced a recession in 1991. Its resilience has since enabled it to bypass several global downturns due to high immigration levels, which add on average about 1 percentage point to annual growth, sound economic policy and an export boom fueled by China. become an economic superpower.

Critics warn that the record streak has led to a sense of complacency that has made Australia vulnerable to this type of external shock. “The more time there has been since the last serious downturn, the less the focus is on what can go wrong,” said Richard Yetsenga, chief economist at ANZ Bank.

“It is hard to believe that household debt would represent 200% of income if the last recession had occurred more recently,” he said. “This pandemic has also worsened the risk profile of the economy, as the most indebted sector – households – no longer has the buffer provided by future interest rate cuts,” he said.

To boost weak employment and inflation data, the Reserve Bank of Australia cut interest rates to a record low of 0.75% in October before the bush and coronavirus crises. In March, the central bank made two more rate cuts and began buying government bonds as the pandemic sparked financial turmoil and wild currency fluctuations. The RBA’s intervention calmed the markets but did not resolve the mortgage debt problems facing workers who lose their jobs.

Australian banks have postponed the payment of 429,000 mortgages as part of a program that gives citizens up to six months of leeway for home loans. In total, banks deferred 703,000 Australian dollars worth of Australian dollars worth six billion Australian dollars due to the pandemic by six months. But they warned that there was a limit to their generosity, and Morgan Stanley predicted that the banking sector’s loan losses could exceed A $ 35 billion over the next three years.

A “bumpy ride”

Many businesses in the Blue Mountains were already struggling due to the devastating bush fires that affected the tourism economy in the region of $ 650 million. The impact of Covid-19 will be much greater and could last longer, making it difficult for some companies to make a profit even when they reopen.

About 60% of Scenic World’s 1.1 million annual visitors are international tourists, and the social distance in its cable cars and rail attractions presents complex management challenges. Hammon says the company will initially depend on the domestic market and possibly New Zealand, which could form a “trans-Tasman travel bubble” with Australia. But he says the government should expand its jobkeeper program for businesses that depend on international and interstate tourism beyond September.

Work has started on a gradual reopening of the Hydro Majestic, a heritage site in the Blue Mountains

Work has started for a gradual reopening of the World Heritage-listed Hydro Majestic in the Blue Mountains © Hydro Majestic

“This is a balance sheet stress test that everyone is sitting on now,” said Hammon, who estimates the company can survive a shutdown for 14 months with continued support from its banks. But he says his biggest fear is a second wave of infections in early winter, which would delay reopening and cause a disastrous blow to staff morale.

At Hydro Majestic, a World Heritage hotel in the Blue Mountains, work is already beginning on a gradual reopening with take-out service and operation and thorough cleaning of the facility starting. But customer demand has raised concerns and the potentially damaging impact of a new foreclosure on the tourism industry.

“What worries us most is the state of mind of the public: are they ready to start traveling again and do they have the economic confidence to spend money,” explains Huong Nguyen, group director Escarpment, which has several luxury properties in the area.

The government has set an ambitious target of 850,000 people returning to work by July, when it plans to reduce most restrictions on social separation, except international travel and large gatherings more than 100 people. Although the mining and construction sectors were allowed to continue during the foreclosure – providing significant tax revenue – Canberra estimates that economic activity has fallen by 4 billion Australian dollars every week, based on a combination of ‘a reduction in labor participation, productivity and consumption, since restrictions have been imposed.

Economists believe that any return to work and economic recovery will likely be a “bumpy ride”, which will depend on controlling the spread of the virus.

“If that is not possible and we have to reimpose the majority of the restrictions, the activity will most likely slide again. Not only would the rules be stricter, but this result would also mean that it is not really possible to relax the restrictions and contain the disease, which would have a significant negative impact on confidence and spending decisions, ” says Sarah Hunter, chief economist at BIS Oxford. Economy.

A herd of cattle herds in Oodnadatta. Beijing has suspended beef imports from certain Australian meat processors

A herd of cattle herds in Oodnadatta. Beijing has suspended beef imports from certain Australian meat processors © Quinn Rooney / Getty

Chinese dependence

The last time the Australian economy faced a major external shock, during the 2008 financial crisis, it benefited from the recovery of Beijing Rmb4tn (857 billion Australian dollars). This has led to a dramatic increase in exports of iron and coal to China and ushered in a decade-long investment boom that strengthened trade and political ties between nations and cemented a free trade agreement in 2015.

Critics say it also left the country too dependent on Beijing. So far, China has failed to trigger a stimulus in response to the coronavirus. Business leaders also warn of a sharp deterioration in diplomatic relations fueled by Canberra’s ban on Huawei’s participation in the deployment of the 5G network in Australia and new laws on foreign interference targeting mainly Beijing have damaged relations and reduces investment.

Approvals for Chinese investments in Australia have been halved to reach A $ 13.1 billion at the end of June 2019, according to government data, while purchases of land and other strategic infrastructure resources and d allegations of espionage are causing growing concern. This follows Beijing’s increasingly aggressive behavior in the South China Sea, where it has militarized artificial islands when it claims to claim disputed waters.

Column chart of direct investment (billions of dollars) showing that Chinese investment in Australia has decreased

“Chinese companies are increasingly wondering if they are welcome here,” said Warwick Smith, former Macquarie Bank executive director and politician.

He warns that Canberra is under “more and more pressure” from Washington to choose the United States rather than China and companies fear that the actions of the government will cause unnecessary damage to relations with Beijing.

“Diplomacy must triumph over hysteria,” said Smith, who stepped down as chairman of the National Foundation for Australian China Relations, a government agency aimed at improving bilateral relations in March, when he became disillusioned at not receiving enough government support.

The Sydney Opera House, which is usually crowded with tourists, last week

The Sydney Opera House, usually crowded with tourists, last week © AFP via Getty Images

Andrew Forrest, the founding billionaire of the mining company Fortescue, and Kerry Stokes, a media mogul who made his fortune selling Caterpillar trucks, led a choir of business leaders calling for calm.

But Beijing has suspended beef imports from some Australian meat processors, and last week prices fell by as much as 80 percent on barley imports. Far from saving Canberra from its difficulties, there is growing concern that Beijing will seek to exploit the country’s vulnerability by targeting other important trade sectors.

“If we are going to take on the biggest debt we have ever had in our lives and we are simultaneously looking at our biggest revenue provider, it is not necessarily the smartest thing you can do,” says Mr. Stokes. “If Beijing’s anger is not suppressed, it could have catastrophic consequences for the economy. “

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