Economic overview

Matthew Howden and David Mobsby

Global economic activity to contract in 2020 by 3%.

The COVID-19 pandemic will cause the global economy to enter recession in 2020.
The 2020 recession will cause incomes to fall globally, but demand for most agricultural products is assumed to remain strong.
The main risk to the outlook is the duration of the COVID-19 pandemic and the measures implemented to contain it.

COVID-19 pandemic to cause global recession in 2020

Since the March 2020 edition of Agricultural commodities, the COVID-19 pandemic has spread to almost all countries globally. Efforts to control the pandemic have caused significant disruptions to economic activity.

In 2020 global economic activity is assumed to decline by 3%. A decline is assumed across advanced as well as emerging and developing economies, with the slowdown most pronounced in advanced economies. This differs from the recession of 2009, when only advanced economies experienced recession while emerging and developing economies continued to grow.

Global economic activity is assumed to decrease by 3% in 2020. In advanced economies, activity is assumed to decline by 6.1% and in emerging and developing economies to decline by 1.1%.

In 2021 global growth is assumed to be 5.8%, advanced economies are assumed to grow by 4.5% and emerging and developing economies by 6.6%
. — **Economic growth, 2008 to 2021**

Some countries have already relaxed measures implemented to control the spread of COVID-19. If shutdown measures can be safely relaxed, economic activity may begin to recover sooner than anticipated. However, significant economic damage has occurred and it remains unclear how quickly this can be repaired. Additionally, relaxing shutdown measures comes with the risk of a second wave of infections and lockdowns.

Oil prices to remain low

Oil prices are assumed to remain low over 2020–21. The price of crude oil fell from around US$60/barrel in January 2020 to US$18/barrel in April 2020. This fall was driven initially by a disagreement over production targets between members of the Organisation of Petroleum Exporting Countries and other crude oil exporters in March 2020. Prices fell further in April 2020 because shutdown measures reduced oil demand.

Lower oil prices will benefit oil importing countries, but reduce the incomes of oil exporters and drag on economic growth in those countries. Low oil prices have significant implications for food and fibre markets. Falling demand for biofuels redirects sugar and corn to food and livestock feed, and means that lower price synthetics displace natural fibres such as cotton and wool.

Incomes to be lower in 2020, but food demand to remain strong

Global income per person is assumed to contract on average by 4% in 2020. This is a larger fall in incomes than occurred during the 2009 recession, when incomes fell by 1.6%. Incomes are assumed to recover in 2021 by 4.7%, in line with improved global economic conditions.

Stimulus response supporting economic activity

As at 28 May 2020 many advanced economies, including those in the eurozone, Japan and the United States, had announced fiscal stimulus packages in an effort to maintain economic activity. Central banks have lowered interest rates and announced other monetary measures to support economic activity. Many governments and central banks in emerging and developing economies have taken similar actions. These policies will support household consumption during the economic shutdown and drive economic recovery in 2021.

Several countries have announced new, or changes to, packages to support their agricultural sector during the shutdown. The United States announced a US$19 billion food assistance program. The EU allowed funds intended for rural development to be reallocated as direct support for farmers during the pandemic. These packages are likely to disrupt agricultural markets because US and EU farmers will receive compensation for production regardless of world prices. The effect is likely to be most pronounced in the corn, oilseed and sugar markets because these prices are already low due to low oil prices.

Temporary increase in panic buying

High levels of uncertainty in early March resulted in panic buying of food and other household items in some countries. This spike in sales resulted in perceived shortages of some items, raised concerns over food security and led to some calls for self-sufficiency. These concerns were short-lived, as household stocks accumulated and both businesses and governments reassured consumers that supply chains were functioning well.

Time spent in grocers and pharmacies increased rapidly in Australia, New Zealand, the United Kingdom and United States around mid March. In the weeks following, time spent in grocers and pharmacies plummeted for Italy, New Zealand and the United Kingdom. Visits decreased in Australia and the United States as well, but not as strongly as in other countries. — **Time spent at grocers and pharmacies, change from average, February 2020 to May 2020**

Beyond short-lived panic spending, the COVID-19 pandemic is expected to affect how households purchase food and the types of food demanded. Food expenditure will remain concentrated in supermarkets and away from restaurants until social distancing and shutdown measures are eased. This is assumed to result in more demand for agricultural staples and less demand for higher value foods.

Despite lower incomes, food demand to remain strong

The 2020 recession represents a significant shock to household incomes. However, overall demand for Australia's agricultural products is expected to remain relatively strong because food is an essential product. Demand for staple foods is less responsive to changes in incomes than demand for other goods, especially in the relatively high income countries that import Australia's agricultural exports (see box).

Effect of an income shock on food demand

Implications for commodity demand in the short term

The global demand for agricultural products is expected to fall proportionally less than the fall in per person incomes caused by measures to combat COVID-19. This is because food is essential, and food expenditure is less responsive to changes in income than expenditure on less essential goods.

Changes in incomes have a proportionately smaller effect on food demand in countries with higher per capita incomes than in countries with lower incomes. When faced with a fall in income, households will reduce spending on discretionary items before essential items such as food.

Chart shows selected trading partners. Consumers in Vietnam have relatively low incomes and spend approximately 40% of their income on food. Consumers in China have higher incomes on average than Vietnam and spend approximately 20% of their income on food. Consumers in high income countries like Italy, Japan and Hong Kong spend about 15% of their incomes on food. — **Income per person and food expenditure share, selected countries**

Demand for more expensive agricultural products such as wine, meat and dairy products is more sensitive to falls in income than the demand for staple products such as cereals. A fall in incomes will result in households consuming fewer of these more expensive goods but maintaining consumption of essential foods.

As incomes rise, consumers' sensitivity to changes in expenditure for different food types changes. Meat and dairy products are the most sensitive to changes in incomes, followed by fruit and vegetables. Breads and cereals are the least sensitive. — **Change in food demand, by commodity and income, selected countries**

Outlook for key Australian agricultural markets

The World Health Organization declaration of COVID-19 as a global pandemic on 11 March 2020 triggered strict and comprehensive public health measures, including social distancing, restricted mobility and border closures. This caused significant disruptions to economic activity and resulted in businesses closing and widespread job losses.

China was the first country to introduce controls in response to COVID-19. Other countries began introducing restrictions in early March. Since mid April Australia, France, India, Japan, the Republic of Korea, the United Kingdom, the United States and Vietnam have been gradually easing restrictions. China and Germany also began easing restrictions around then, but have had to increase them again in response to rising infections. — **COVID-19 Government response stringency index, selected countries**

As at 28 May 2020, most advanced countries have begun easing restrictions. China began easing restrictions in early April. However, in some countries and regions, such as China and Germany, infections began to rise and governments responded by re-imposing restrictions. This is an ongoing risk, which is likely to disrupt economic activity until the health effects of COVID-19 are controlled.

Recent economic events in key Australian agricultural markets

China, Japan, the United States, the European Union, the Republic of Korea and South-East Asian countries accounted for 64% of the value of Australia's agricultural exports in 2018–19. As at 20 May 2020, March quarter GDP data were available for a number of key trading partners and provide an early indication of the cost to these economies of measures to contain the pandemic.

In 2018–19 agricultural exports to our major markets accounted for 64% of total exports.
Exports to China were valued at $13.1 billion.
Exports to Japan were valued at $5.4 billion.
Exports to the United States were valued at $4.4 billion.
Exports to the Republic of Korea were valued at $3.3 billion
Exports to the European Union were valued at $2.8 billion.
Exports to Indonesia were valued at $2.5 billion
. — **Major agricultural export markets, selected indicators**

In the March quarter 2020 the Chinese economy shrank by 6.8%. This reflects the strongest fall in economic activity of any economy so far and indicates the high economic cost of the containment measures that were in place throughout most of that quarter.

The United States, eurozone and United Kingdom have been significantly affected by the COVID‑19 pandemic. Economic activity in the March quarter 2020 declined by 4.8% in the United States, 3.3% in the eurozone and 1.6% in the United Kingdom. Japan's economy shrank by 2.2% in the quarter and the Republic of Korea's economy by 1.6%.

Statistics for the June quarter 2020 are likely to show a greater decline in economic activity because most countries were under lockdown during this period.

Outlook for export demand

The outlook for the economies of key Australian agricultural markets assumes that COVID-19 will be contained early in the second half of 2020, with the impacts of containment measures on economic activity beginning to fade in the second half of 2020.

In 2021 global economic growth is assumed by the International Monetary Fund to rebound strongly to 5.8%. Growth is assumed to be 4.5% in advanced economies and 6.6% in emerging and developing economies. Despite this strong growth, global economic activity is still assumed to be 4% lower in 2021 than it would have been without the pandemic.

Economic activity in 2020 is assumed to decline in the eurozone by 7.5%, in the United Kingdom by 6.5%, in the United States by 5.9%, in Japan by 5.2%, in the Republic of Korea by 1.2% and in the ASEAN-5 by 0.6%. Economic activity in China is assumed to grow by 1.2% and in India by 1.9%.
In 2021 economic activity is assumed to grow in the eurozone by 4.7%, in the United Kingdom by 4%, in the United States by 4.7%, in Japan by 3%, in the Republic of Korea by 3.4%, in the ASEAN-5 by 7.8%, in China by 9.2% and by 7.4% in India. — **Gross domestic product growth, major trading partners, 2019 to 2021**

Key risks to the outlook stem from COVID-19

Risks to the assumed recovery of global growth and demand for Australia's exports are weighted towards the downside, and largely depend on the duration of the COVID-19 pandemic.

The risk of removing restrictions too soon and causing a second wave of infections is significant. A second wave of infections will result in further lockdowns and constrained economic activity.

The duration of the pandemic also raises risks around the success of policies to support economic activity during the shutdown. Fiscal support policies may need to be continued longer than expected in countries where containment measures are required for extended periods.

A prolonged recession elsewhere in the world is a risk to economies that have been able to contain the virus. Economies such as Australia, China, Japan, the Republic of Korea and some South-East Asian economies are heavily reliant on trade. They depend on other major economies to consume their products and supply inputs. This means that their economic recovery will depend on the recovery of their major trading partners.

Tourism-dependent economies, such as Indonesia, Thailand and—to a lesser extent—Japan, will suffer until international travel restrictions are removed. The 2020 Tokyo Olympics have been postponed and are currently scheduled for July 2021. Restrictions on international air travel are likely to remain in place until 2021 and it is uncertain how COVID-19-related health concerns will affect tourism demand in 2021 and beyond.

Beyond COVID-19 other risks still loom

COVID-19 is the principal risk to the economic outlook. However, there are a number of other risks to global growth and Australia's export markets.

The ongoing China–US trade dispute continues to affect global trade and is a risk to the outlook for Australian exports. Since agreeing to the terms of phase one of the deal (see economic overview March quarter for details) there have been no further escalations of trade sanctions. However, tensions between China and the United States have escalated over the origins of the COVID-19 pandemic and these tensions could be expressed in trade policy.

In the United States, risks to the economic outlook stem from the upcoming presidential election and the possibility of a second wave of infections. As at 3 June 2020, neither presidential candidate had made any major policy announcements nor was the pathway to resolving the unrest certain. The outcome of the election, and which policies will prevail after it, is a source of uncertainty that will influence the economic recovery of the United States and the world. Civil unrest, which began in late May and has extended into June, elevates the risk of increased COVID-19 infections.

The United Kingdom's scheduled exit from the European Union on 31 December 2020 continues to pose risks to the outlook for the eurozone. The terms of the post-exit trade agreement between the United Kingdom and the European Union are still uncertain and these negotiations will likely be complicated by the COVID-19 pandemic.

Australian economy

The Australian economy is assumed to contract sharply in the June quarter 2020, reducing average economic growth over 2019–20 to –1%. The assumed decline over the second half of 2019–20 is largely the result of social distancing and other measures introduced in March 2020 to slow the spread of COVID-19. The closure of many businesses has reduced employment and hours worked. Fiscal support packages such as JobSeeker and JobKeeper payments will help to support household consumption during the economic shutdown.

Gradual easing of social distancing and a consequent rise in economic activity are assumed to result in GDP recovering in the second half of 2020. However, over the 2020–21 financial year GDP growth is still assumed to decline by 3%.

Australian dollar to remain low in 2020–21

The Australian dollar averaged US67 cents in 2019–20 and is assumed to average US66 cents in 2020–21.

In early 2020 the global COVID-19 pandemic brought high levels of uncertainty to global financial markets, resulting in a rapid depreciation of the Australian dollar. This uncertainty saw the US dollar strengthen against a range of currencies because of strong demand for—and reduced supply of—safe-haven assets like the US dollar. During this period, the Australian dollar dropped to US56 cents, its lowest value since April 2003.

Measures taken by governments to contain the spread of COVID-19 initially calmed financial markets and the policy response of the US Federal Reserve eased demand pressure on the US dollar. In late May and into early June, the Australian dollar appreciated further against the US dollar, driven by high iron ore prices.

Global uncertainty drives the value of the United States dollar trade weighted index. In periods of very high uncertainty, such as the global financial crisis, the US–China trade war and the COVID-19 pandemic, investors seek the US dollar as a safe place to store wealth. This drives up the value of the US currency. — **Economic uncertainty drives the US dollar, January 2006 to March 2020**

Risks to the Australian outlook

Significant downside risks to the recovery of the Australian economy remain. Prolonged enforcement of measures to contain COVID-19 by major trading partners could slow the anticipated global economic recovery. This would reduce export demand and Australia's own economic recovery prospects.

Risks also stem from trade relationships with key trading partners. Trade tensions between China and Australia increased in May 2020. China imposed significant tariffs on Australian barley imports and suspended four major Australian abattoirs from the Chinese beef market. China's bans on abattoirs exporting beef to China are not unprecedented. However, if Chinese policy continues to be unpredictable, exporters may seek alternative markets even if that means accepting lower margins.

Further escalation of trade tensions, would likely result in slower than assumed growth and a lower Australian dollar.

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