When news of the coronavirus first started to filter out into the world, some economists tried to play down the impact it would have on the world economy, a move that baffled leading global economist Jonathan Pain. Mr Pain advised an enrapt audience of more than 400 people at UDIA WA’s industry lunch last Friday that the impact of coronavirus was a ‘global cardiac arrest’, one we need to face the economic reality of.

“I am not going to sugar coat the ramifications of the situation today,” Mr Pain said. “China will see a contraction in Quarter 1 GDP, and it is going to be a significant one. This has ramifications for us here in Australia and we will see a contraction in GDP in Q1 this year, which may well trickle into our second quarter.

“We may then face a challenge to the economic record we’re most proud of; for the last 21 years or so of not experiencing a recession.”

Mr Pain’s comments provided the stark reality of how big an impact the coronavirus will have on the world and how it will affect people and businesses here in Western Australia.

Mr Pain said the impact of the coronavirus would be felt here in Western Australia due to our over reliance on China. He said WA needed to diversify our economy and look to other emerging Asian countries.

“You import far too much and you export far too much to China, look to Vietnam, South Korea, Taiwan, India – any other country in Asia, you’re far too reliant on China,” he said.

Indonesia was another country Mr Pain pointed to as one Australia, and WA in particular, should look to engage with more.

“Indonesia is our nearest neighbour, but do we harness, do we leverage, do we really forge this potential opportunity? I don’t believe so,” he said.

“It is a remarkable nation, the fourth most populous in the world with 265 million people, the increase in population in just the last five years is equivalent to the entire population of Australia.

“We need to engage more with Indonesia, they are our friends.”

In stark terms, Mr Pain said he had seen estimates that 69% of the Chinese economy had effectively been shut down and other estimates that suggest up to 400 million people in China today are in some form of coercive quarantine.

These figures become even more threatening when coupled with the knowledge that China comprises 17% of the global economy and without China’s monetary fiscal stimulus in 2008, the world would not have recovered as it did from the Global Financial Crisis, according to Mr Pain.

“We should be thankful for the Chinese for that,” he said.

“The price they paid was an extraordinary acceleration in debt levels right across the Chinese economic landscape, particularly corporate debt. The coronavirus comes at a very delicate moment for the Chinese economy so the very fact that they have quarantined so many people shows they are willing to take some economic pain to ensure the global health ramifications are not too severe.

“Perhaps once again we should thank the Chinese for taking these actions, but the consequence is clear; massive economic dislocation in the second largest economy in the world. The Chinese will stimulate but the economic dislocation will guarantee a global retraction and a material downgrade in the expectations of corporate earnings from many of the world’s largest companies.”

To put this into context Mr Pain pointed to the fact that Hyundai, a South Korean car manufacturer, is not able to produce a car in South Korea because they have run out of component parts from China. The same can be said of Kia and the Japanese car manufacturers but perhaps most worryingly of all is that German car manufacturers might also have to start shutting down production.

“The locomotive of Europe is the German economy, this is one of the world’s best manufacturing powerhouses, but an increasing number of German companies are raising the red flag,” he said. “If they don’t get component parts from China in the next week, they will start shutting down production, that is how integrated the global economy is today.

“What we’re seeing in China is your quintessential classic black swan event.”

Where to from here?

Adding to the impact of the coronavirus in Australia is the timing of its occurrence. As Mr Pain said, the coronavirus has hit at a time when our nation has just been decimated by bushfire and before that drought followed by extraordinary episodes of flooding.

Mr Pain said now was the time for the Federal Government in particular to implement some much-needed fiscal stimulus. He said he did not believe the Reserve Bank of Australia Governor Philip Lowe was comfortable with the introduction of unconventional monetary policies, such as Quantitative Easing.

“He wants to depend on conventional monetary policies, namely the cash rate,” Mr Pain said. “We have a Government that is entranced by a back in black mentality. There is an ideological fixation with balanced budgets and surpluses but if ever there was a time for fiscal stimulus in Australia it is now, we saw it in 2008 but in 2020 the requirement, the need, the necessity for fiscal stimulus is overwhelming.

“Morrison and Frydenberg can point to the fact the Coronavirus is an exogenous shock that did not come out of the Australian economy but this is the time the Australian government really needs to start opening up the fiscal stimulus pipeline and the same goes in my view for the WA Government.

“In a couple of months’ time, when we see confirmation of the economic shock I have been describing today, when we see the confirmation in the numbers, I don’t want anyone in Canberra to say, ‘who could have seen that coming’. Because Canberra it is coming. The writing is on the wall. We can see the shockwaves coming out of Wuhan, it’s coming, get ready and act.”

UDIA WA has made several recommendations to the State Government in relation to opportunities to diversify the economy and stimulate the market in our 2020 Policy Priorities document that will be launched to members in early March.  We are focused on ensuring that all stakeholders understand the importance of the property industry to the broader economy and recognise the positive impact that construction and property market activity can have on creating jobs and attracting more people to the state.