Economic overview

Robert Curtotti and David Mobsby

Economic conditions to improve in 2021.

Global recovery slow and uneven

Measures to contain the spread of COVID-19 continue to affect demand for Australia's agricultural commodities. A contraction of the global economy is expected for 2020. Projected growth in 2021 is expected to be strong, but despite this, the level of global GDP will only be slightly above that in 2019, implying the emergence of output gaps and higher unemployment. The loss of almost a year of output growth for the global economy implies a drawn out recovery for employment, with the output gap lingering beyond early 2021. Recovery will be uneven, reflecting patchiness and delays in economic re-opening due to subsequent and ongoing waves, and uncertain timing for the deployment of effective vaccines.

Agricultural trade has been resilient, but the rising cases of COVID-19 in Europe and the United States pose some risk to the demand for Australia's agricultural exports because of the size of these economies and their impact on the global economy. Uncertainty also surrounds fiscal and monetary policy that could support household incomes and food demand in these regions into 2021. The latest wave of infections is likely to slow recovery in the prices for higher-value agricultural commodities. For example, recovery in demand for woollen apparel will likely be delayed, negatively affecting wool prices.

In China, containment of COVID-19 has been broadly successful, allowing the economy to rapidly recover. However, trade tensions have created uncertainties for some Australian agricultural exports. Disruptions to trade are occurring, with Australian exporters expected to divert trade to the next highest value markets.

Oil prices to remain low

Ongoing reduced people movement from COVID-19 induced lockdowns is likely to reduce demand for transport fuels. This will maintain low global crude oil prices for the remainder of 2020 and early 2021 delaying economic recovery for oil-exporting nations. International oil prices are projected to rise slightly by the middle of 2021 but remain well below the levels of late 2019.

A mix of factors will influence crude oil prices into 2021. Prospects of an effective vaccine against COVID-19 have provided some recent support to oil prices, partly countering the demand-reducing impacts of high rates of infections in Europe and the United States. It is unclear how OPEC+ members will respond to an emerging scenario of extended lockdowns, but initial signs suggest the group will continue to restrict supply in a bid to support prices into early 2021.

Change in quarterly GDP growth by region, quarter 1 to quarter 3, 2020
Note: Quarterly growth rates of real GDP. Change compared to same quarter in previous year.
Source: OECD

Demand for food has been resilient, but consumption patterns changing

In general, expenditure on food has been less affected by measures designed to contain the spread of COVID-19 than expenditure on other goods and services. This is despite higher levels of unemployment in key markets such as the eurozone, the United Kingdom, the United States, Indonesia and Japan. Demand for food is relatively unresponsive to changes in income because food is a staple (see Agricultural commodities: June quarter 2020). Additionally, restrictions on eating out have resulted in substitution to home-based consumption rather than decreased food demand. This has changed the type of processing that food products undergo.

Household goods and services expenditure, United States and Japan, June 2018 to September 2020
The United States and Japan experienced a significant dip in expenditure on services in early 2020 and then recovered. Expenditure on goods has been less negatively affected by COVID-19 than services expenditure.
Notes: US data is total personal consumption expenditure, seasonally adjusted. Japan data is for households of 2 or more people. June 2018 = 100.
Sources: Bureau of Economic Analysis; Statistics Japan

Consumers have adapted to restrictions on eating out by increasing online food purchases – intensifying and continuing an existing trend. Online food retailing has risen sharply in many economies. In the Republic of Korea, online food retailing increased by 54% over the first 9 months of 2020 to 14.1 trillion won. An increase in online food retailing has also been observed in Australia during 2020 and accounted for 5.7% of all food retailing in September 2020 compared with 2.8% in January 2020.

Food expenditure, United States and Australia, January 2018 to September 2020
In the United States total food expenditure rose in March 2020 followed by a sharp fall in April 2020. Total food expenditure increased between April 2020 and June 2020. Food-at-home expenditure spiked in March 2020 before falling in April 2020, but remained elevated to June 2020 compared with pre-pandemic levels. Food-away-from-home fell sharply between February 2020 and April 2020, but partially recovered between April 2020 and June 2020. Australia total food expenditure rose in March 2020 followed by a sharp fall in April 2020. Total food expenditure increased between April 2020 and June 2020. Food-at-home expenditure spiked in March 2020 before falling in April 2020, but has remained elevated to June 2020 compared with pre-pandemic levels. Food-away-from-home fell sharply between February 2020 and April 2020, but partially recovered between April 2020 and June 2020.
Notes: For the United States, food-at-home expenditure refers to food and beverages purchased for off-premises consumption and food-away-from-home refers to food services expenditure on meals and beverages. US Food expenditure is measured as total personal consumption expenditure on food-at-home and food-away-from-home. For Australia, food expenditure is total retail spending on food. Food-at-home expenditure refers to food retailing expenditure and food-away-from-home refers to expenditure at cafes, restaurants and takeaway food services. Expenditure data has been seasonally adjusted.
Sources: Australian Bureau of Statistics; Bureau of Economic Analysis

Some changes in consumer behaviour are likely to extend beyond the current pandemic. For example, the current trend towards working from home and conducting virtual meetings will have implications for the pattern of demand for agricultural commodities over the longer term. This will especially affect inputs for away-from-home meals in office precincts and for the catering sector that services business travel. The increased use of online ordering platforms will affect how food products are delivered along the supply chain to consumers.

In China, growth in consumer expenditure on most categories was down in 2020 despite positive growth in GDP in the second and third quarters of 2020. Food retail expenditure was 11% higher in the first 3 quarters of 2020 compared with the first 3 quarters in the previous year – most of this growth occurred in urban areas. In comparison, food expenditure at catering services was 24% lower, which will continue to be detrimental to the demand for higher-value foods products.

Annual growth in consumer expenditure over first 3 quarters of 2020, China, by category
Most categories of expenditure in China declined in the first 3 quarters of 2020, with the exception of food, tobacco and liquor and residence expenditure, which rose.
Note: Growth compared to same period in previous year.
Source: National Bureau of Statistics, China

In Japan, expenditure on food and beverages was steady, but expenditure on machinery and equipment, such as electronic goods, and medicine and toiletries rose. Retail sales in the third quarter of 2020 were at a similar level to the third quarter of 2019. However, the pattern of consumption expenditure was quite different – expenditure on fabrics, apparel and accessories, motor vehicles, general merchandise and fuel was significantly reduced.

Annual growth in consumer expenditure, Japan, 3rd quarter 2020, by category
Consumer expenditure in Japan increased for machinery and equipment and medicine and toiletries in the third quarter of 2020 compared with the same quarter in 2019. Consumer expenditure remained steady for food and beverages but declined for fuel, general merchandise, motor vehicles and fabrics, apparel and accessories.
Note: Growth compared to same period in previous year.
Source: Ministry of Economy, Trade and Industry, Japan

Economic stimulus supporting agricultural goods trade

The inherent stability of demand for food has been assisted by a range of fiscal and monetary support measures designed to support household incomes. By the middle of 2020, more than US$10 trillion was provided to support the global economy. The level of support has varied across countries, ranging from 5% to 45% of GDP. High unemployment in major economies is likely to induce continuing fiscal and monetary policy responses, which will reduce as economies recover.

Agricultural commodity trade has benefited from this support. Assistance to industry to deploy COVID-safe operational work processes has meant that supply chains have mostly continued to operate throughout the pandemic. This has been important in keeping meat-processing facilities operating during 2020. These facilities proved vulnerable to COVID-19 due to the difficulty of social distancing on production lines. Support for airfreight services has been important in sustaining the supply of seafood and high-value horticultural products to export markets. On the demand side, fiscal and monetary expansionary policy has sustained incomes, which has supported demand for agricultural commodities.

Trade in goods recovering, commercial services lagging

Global goods trade is slowly recovering from the COVID-19–induced disruptions in early 2020. The recovery in trade has been faster than the recovery following the global financial crisis, despite the current decline in global economic activity being more significant. This reflects the different nature of the current crisis. Recovery in goods trade has been observed across several major economies, most notably during the third quarter of 2020 when global goods trade approached pre-COVID-19 levels.

Recovery in global services trade has been slow. Trade in commercial services is significant, with international passenger transport and freight making a large contribution to overall services trade. Other components include telecommunications and business services. The short-term outlook for the recovery in domestic travel remains uncertain due to rising COVID-19 cases and consequent lockdowns. International travel remains subdued when compared to pre-COVID-19 levels. Despite encouraging signs of recovery in flight travel, recovery in services trade remains subdued and the level of exports is well below pre-COVID levels.

Services trade indirectly requires significant inputs from the agricultural sector – for example, catering for travel and accommodation and out-of-home meals. Delay in recovery of this sector is likely to alter the pattern of production in the agricultural sector, with product being directed to alternative markets at lower prices.

Global trade in goods and services, January 2013 to August 2020
The goods trade index declined sharply in early 2020 and then recovered. However, the services trade index declined more sharply and has only slightly recovered, remaining well below the pre-COVID index level.
Note: January 2013 = 100.
Sources: CPB Netherlands Bureau for Economic Policy Analysis data for goods trade; WTO Secretariat estimates for services trade

Agricultural trade has been resilient

Agricultural trade has been far less disrupted by efforts to contain the spread of COVID-19 than trade in other goods. This is consistent with experience during the global financial crisis, because food demand is relatively unresponsive to changes in income. Agricultural trade has also been less affected than other goods because bulk shipping – the main mode of transport for agricultural trade – has been less disrupted than other forms of transport, such as airfreight.

Global goods trade, quarter 4, 2019 to quarter 2, 2020, by category
Agricultural goods trade was steady in the first quarter of 2020 and declined in the second quarter. The decline in agricultural goods trade was significantly less than for manufactures, and fuels and mining products.
Note: Growth compared to same period in previous year. Percentage change in US$ values.
Sources: WTO Secretariat estimates

Australia's economy showing signs of recovery

An easing of the State border restrictions that impeded people movement in 2020 is expected to cement the improvements in consumer confidence observed in the final quarters of 2020. This is expected to result in GDP recovering in the first half of 2021. However, the economy is still assumed to contract by around 3% in the 2020–21 financial year (see November 2020 RBA Monetary Statement) but grow in the 2021 calendar year.

Around 30% of Australian agricultural production is consumed domestically. Despite the anticipated contraction in economic activity in 2020–21, domestic demand for Australia's agricultural products is expected to remain relatively strong. This is because food is an essential good and because the pandemic has been well managed. Increased people movement will help sustain a recovery in the domestic travel, accommodation and food services sectors, which will support demand for higher unit value agricultural products. A low incidence of COVID-19 in Australia is also allowing business precincts to re-open, which will increase demand for away-from-home meals.

Value of dollar forecast to rise

The value of the Australian dollar affects the relative cost of Australia's agricultural exports to consumers in foreign markets. The exchange rate averaged US67 cents in 2019–20 but was volatile throughout the year, varying between US56 cents and US71 cents. The exchange rate is expected to average US73 cents in the 2020–21 year. This will make Australia's agricultural exports less competitive in global markets and increase pressure on producers to reduce costs.

Rising iron ore prices and a depreciation of the US dollar contributed to the appreciation of the Australian dollar between March 2020 and early November 2020. Rising iron ore prices resulted from supply constraints in Brazil, which is the world's second largest iron ore exporter after Australia. Rising steel demand from China due to increased economic activity and government stimulus also contributed to rising iron ore prices, particularly in the latter half of 2020.

In late 2020 the US dollar depreciated against a range of currencies, further strengthening the Australian dollar. This has been driven by an anticipation of monetary and fiscal stimulus to address a shortfall in consumer demand, and anticipation of opportunities for investment in emerging economies with the expected rapid deployment of a COVID-19 vaccine in 2021. These factors are expected to keep the Australian dollar in the low to mid 70 cents range in early 2021.

Recent movements in A$/US$ exchange rate, July 2019 to November 2020
The main drivers of movements in the exchange rate have been Reserve Bank of Australia rate cuts, quantitative easing in the United States, the onset of the COVID-19 pandemic and the iron ore price. The appreciation of the exchange rate appears to be closely tied to increases in the price of iron ore.
Source: RBA, IMF

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Last reviewed: 4 December 2020
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