Coronavirus Australia: Victoria’s economic crash will hit country hard

We may have closed the borders to Victoria to halt the spread of COVID-19 but an economic contagion is about to hit Australia.

Victoria’s coronavirus crisis is barely contained, with a record number of cases reported on Wednesday.

The state government is continually on the hop, moving to ever-stricter lockdown rules as the coronavirus evades its grasp. Other states are horrified by the hundreds of hospitalised cases, by the cost in lives lost, and by the intense restrictions necessary to combat infection.

Every Australian state now has its borders closed to Victoria in the hope of keeping the virus out. But the economic contagion is even more insidious than the viral contagion.

Australia’s economy will be dragged down by Victoria’s performance.

Victoria is about one fourth of the national economy as the next graph shows. Think about the Australian economy like a car with four tyres on the ground. One of those tyres just popped and the national economy is screeching all over the road. We need to regain control, pull over, fix the blowout and slowly get moving again.

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Victoria's share of the national economy.

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Victoria’s economy is deeply interlinked with the rest of the country. As you can see in the graph above, the nation’s manufacturing, finance industry, IT and manufacturing are all disproportionately based in Victoria.

Even where a big business has its HQ elsewhere, it needs Victoria for results. For example, Wesfarmers might be headquartered in Perth, but a quarter of its Officeworks stores are in Victoria. Similar holds true for Woolworths. The HQ is in Sydney, but around a quarter of its stores are in Victoria. As Victorians lose their jobs and get poorer, the effects flow outward to the rest of the country

One industry has cleverly managed to get its operations out of the plagued state. The Australian Football League moved all matches to Queensland, South Australia and Western Australia.

While the MCG sits forlorn and lonely, that’s a bonus for those other states – economic activity that would not have happened otherwise. So it’s not all bad news for other states. In some cases Victoria’s loss is their gain. Tourism is another example.

VICTORIA FILLS THE SUPERMARKETS

One big way the nation depends on Victoria is for food. Victoria makes beer brand VB, as we all know, but did you realise Victoria is the biggest food and beverage manufacturing state in the whole country? According to the most recent data from the Australian Food and Grocery Council it makes $33 billion worth of stuff you might buy at the supermarket, which is ten per cent more than NSW.

In fact, Victoria makes so much food it is a big supplier to the rest of the world. Forty three per cent of Australia’s grocery exports come from the smallest mainland state.

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Chobani yoghurt production factory in Dandenong, shown in 2017, is just one example of food produced in Victoria. Picture: Stuart McEvoy for the Australian.

Chobani yoghurt comes from Melbourne’s south east. So do Carman’s muesli bars. DON salami is made in regional Victoria. There’s thousands of food manufacturers dotted all over Victoria, and they are mostly still allowed to operate – under strict COVID-safe plans.

These businesses have to keep going, because we don’t want the whole country to go hungry. Even abattoirs, which are the cause of many outbreaks, are still operating at two-thirds capacity so Australians can still get chicken drumsticks and lamb chops. This vital role means it will be slower to arrest the virus in Victoria than if these businesses were shut down.

THE EFFECT

The whack to the national economy from Victoria’ outbreak will be substantial. As this chart from ANZ bank shows, it means national employment will no longer improve in August and September. Instead of the slow, grinding recovery that was the best we could hope for, we sink deeper into the mire.

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Latest estimates show employment will no longer improve come August. Image: Supplied.

That means more and more Aussies finding out they’re redundant, more and more Aussies ending up on the JobSeeker payment that is about to be cut, more and more Aussies applying for every job that is advertised and being frustrated they don’t even get an interview.

Westpac has revised down economic growth forecasts since the Victorian outbreak says that by the end of the year, all Australian states will still have weaker economies than they had in December 2019.

“We expect NSW to be at 96 per cent by year’s end; Victoria at 90 per cent; Queensland, South Australia, Tasmania and Northern Territory at 97 per cent and WA at 99 per cent,” wrote chief economist Bill Evans in a research note on Wednesday. “Nationally, activity by year’s end would be around 95.3 per cent of the end 2019 level.”

Of course, these forecasts are made at a time of unprecedented uncertainty. The future has never been so hard to predict. Maybe the Victorian outbreak will clear up quickly as summer comes and the national economy will spring back bright and hard? Or maybe the mini-outbreaks in NSW will worsen and the national economy will soften and crumble. We’re at the mercy of forces that we can barely control.

The one thing we can control is government spending. The federal government has already done a huge amount to stop the economic calamity becoming even worse. If needed, it should do more to prop up the Victorian economy. Remember, a quarter of all the economic weight of Australia rests on Victoria, and it will be in the nation’s interests for it to be as solid as possible.

Jason Murphy is an economist | @jasemurphy. He is the author of the book Incentivology.