China bounce offers hope to Australia

Workers on the streets of Wuhan in China's central Hubei province last week. Picture: AFP

Being the first optimist at the scene of a global disaster of unprecedented magnitude is usually met with scepticism, but … here goes.

There’s growing scope to believe that Australia’s economy won’t be catatonic for much longer.

For those hunkering down at home and binge-watching Netflix sitcoms, talk of recovery will sound fanciful. And given the tsunami of truly distressing news from around the world, it might even anger some.

It is important to note that a recession (Australia’s first since the early 1990s) is virtually unavoidable, a big rise in unemployment is unfolding, and many small businesses are likely to be swept from the economic landscape.

The human scars of the COVID-19 crisis will be visible for years to come, and all efforts must be made to address that pain.

That said, the good news for Australia is that after months of terrifying images from Wuhan, the lights are coming back on in China.

The world’s second-largest economy, and a critical source of demand for Australian exports, looks like it is through the worst and daily life is returning to something that is starting to resemble normality.

Data in recent days supports the optimism.

An official gauge of China’s manufacturing activity rebounded strongly in March as work resumption picked up.

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The official manufacturing purchasing managers index jumped to a reading of 52.0 in March from a record low of 35.7 in February, China’s statistics bureau said on Tuesday. Readings above 50 indicate expansion, while those below 50 signal contraction.

The Caixin China General Composite PMI jumped to 46.7 in March 2020 from a record low of 27.5 in the prior month, figures released on Friday show.

While this was the second-lowest reading in 11 years, it showed some recovery from February.

The data is very encouraging for Australia, which channels more than 30 per cent of its exports to China. But Australia’s exports to China include more than just iron ore.

The country’s big services exports like education and tourism will be flattened for some time while strict social distancing rules remain in place.

The risk of secondary viral outbreaks in China also can’t be ruled out.

But the improved economic pulse in China is a ray of hope that the virus can be contained, even in areas that are densely populated.

“China is starting to mend and it holds out the promise that Australia’s shutdown, and hence direct hit to the economy, may not be as long as feared if we are rigorous in practising social distancing,” says AMP Capital chief economist Shane Oliver.

Stephen Innes, chief global markets strategist at AxiCorp, says evidence of recovery in China will trigger an uptake of commodities and boost commodity prices, especially iron ore, Australia’s largest export.

China looks set to roll out more stimulus, and Innes says this will be received well by markets.

The wave of economic stimulus provided globally and in Australia is helping to tip the scales away from a long drawn-out downturn, Dr Oliver says.

The amount of stimulus tipped into Australia’s economy in the form of wage subsidies and support for small business, renters and the jobless is truly jaw-dropping, while the Reserve Bank of Australia has also deployed most of its remaining ammunition to good effect.

Meanwhile, unemployment may peak for this crisis at 9 per cent due to significant steps taken by the government, including a wage subsidy of $130bn, says Westpac chief economist Bill Evans.

This is much lower than the bank’s earlier estimate of 17 per cent.

It’s important to remember that the pandemic is unlike the global financial crisis in 2008-09. Underlying the current situation are fundamentally solid economies, Australia’s included.

If the virus is contained in places like Europe and the US in the coming months, a sharp economic recovery could emerge quickly.

Yes, there are a lot of ifs.

Research firm Oxford Economics concedes the global economy will contract sharply in the second quarter, but points to other evidence that suggests global growth could rebound at speed.

The dynamics of virus deaths in the West are similar to patterns seen in Asia, indicating a turnaround soon, says Tamara Basic Vasiljev, London-based senior economist for global macroeconomics at Oxford Economics.

“There are still plenty of things that can go wrong … but if the dynamics of new recorded deaths keep following the Asian patterns things should start to look better in matter of weeks, rather than months,” she added.

James Glynn is The Wall Street Journal’s Australian economics correspondent.