Economic overview

​​David Mobsby and Mikayla Bruce

Economic crisis deepens through 2020 and slow recovery expected

The full effect of COVID-19 related lockdown measures has become apparent during the second quarter of 2020. The COVID-19 pandemic has had a greater impact on global economic activity than initially anticipated. This has been reflected in record falls in economic output during the second quarter of 2020. As a consequence, the global economic outlook has been downgraded and the return to trend economic growth is expected to be slower.

Path to economic recovery uncertain

Recent data suggest the beginnings of economic recovery in several countries. This in part reflects that some countries have begun relaxing containment measures. It also indicates the impact of substantial fiscal and monetary stimulus. Global economic recovery is expected to begin in the third quarter of 2020. However, the extent of economic damage from the COVID-19 pandemic means that economic contraction is expected for 2020.

Global economic growth is expected for 2021, but the speed and extent of economic recovery is subject to considerable uncertainty. Global economies are currently in various states of pandemic-related restriction and recovery. Global confirmed cases of COVID-19 continue to rise and some countries are experiencing subsequent waves of new infections – including Australia and Japan. The risk of further outbreaks and the control measures required to contain them mean that economic recovery may be slower than currently expected.

Contraction in global trade in 2020

The current economic downturn has significantly impacted international trade. Global trade contracted sharply over the first 5 months of 2020. The decline in trade volume has been similar in magnitude to the contraction observed during the global financial crisis, despite the current decline in global economic activity being more significant. Falls in trade volumes have been observed across a number of major economies, most notably during the second quarter of 2020, reflecting the extent of economic disruption.

Agricultural trade appears to be far less disrupted than trade in other goods (see Australian agricultural trade and the COVID-19 pandemic). This is consistent with experience during the global financial crisis. The main reason for this is that food is an essential good. 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.

Between January 2020 and June 2020, the value of US food, feed and beverage exports fell by far less than the export value of other goods. Similarly, the value of live animal and food imports into the European Union fell by far less than imports of other goods during the first 5 months of 2020.

In contrast to many major exporting economies, Australian merchandise trade remained robust during the first half of 2020, supported by record-high iron ore exports. Australian agricultural exports have remained relatively stable over this period. In the first half of 2020, Australian agriculture exports reached $23.5 billion, 4% lower than the same period in 2019.

Consumer behaviour in response to COVID-19 measures

The COVID-19 pandemic has had a profound effect on the level and composition of consumer spending. Consumer expenditure declined significantly in many economies over the first half of 2020 due to weakening economic conditions, reduced consumer choice and low consumer confidence. However, consumer expenditure has started to recover in several economies during recent months. Easing of restrictions, improvement in economic conditions and sustained control of the COVID-19 pandemic should improve consumer confidence and support consumption over the short term.

For some economies, fiscal stimulus has supported household incomes during this period. For example, in the United States, despite income increasing in the second quarter of 2020 consumption fell and savings increased significantly. It is likely that this is the result of a combination of restrictions, voluntary social distancing and uncertainty about future income leading to precautionary savings.

Changes in consumer behaviour and patterns of consumption occurred in a number of economies as consumers adapted to restrictions and social distancing. In economies where consumption expenditure has improved, increases in expenditure on goods has exceeded increases in expenditure on services. This is thought to be a consequence of restrictions and social distancing and may also reflect substitution from services to goods (for example, eating more meals prepared at home rather than at restaurants).

High levels of uncertainty in early March 2020 resulted in panic buying of food and other household items in some countries. The result was a spike in some expenditure measures. Since March 2020 food expenditure has fallen. However, it has remained relatively stable compared to other types of consumer expenditures, especially in advanced economies. This is because food is essential, and food expenditure is less responsive to changes in income than expenditure on less essential goods.

Consumers have also adapted to restrictions and social distancing by increasing online purchases – although this is a continuation of an existing trend. Online food retailing has risen sharply in a number of economies. In the Republic of Korea, online food retailing increased by 44% over the first 6 months of 2020 (to 1.9 trillion South Korean won). An increase in online food retailing has also been observed in Australia during 2020 and accounted for 4.6% of all food retailing in June 2020.

Strong food expenditure points to robust demand for agricultural products. However, the type of processing these products undergo may change given that consumers are buying more food items away from restaurants and ordering more food online.

Economic contraction in key Australian agricultural export markets

China, the European Union, Indonesia, Japan, the Republic of Korea and the United States accounted for 63% of the value of Australia's agricultural exports in 2018–19. Global efforts to control the pandemic through lockdowns, travel restrictions and social distancing have caused significant disruptions to economic activity in these economies. The full magnitude of these disruptions has only become evident in data for the second quarter of 2020 – the first full quarter where economies were subject to restrictions. Economic results for that quarter show record falls in output.

In China the early onset of COVID-19 and subsequent easing of restrictions, combined with supportive fiscal and monetary policies have enabled China to record positive growth in the second quarter of 2020. Despite recent positive economic growth, household consumption remains low. Total retail sales of consumer goods in June 2020 was 1.8% lower than June 2019. However, expenditure on food has remained relatively strong. Grain, oil and foodstuff retail sales was 10.5% higher in June 2020 compared with June 2019, which may be partially due to a reduction in food expenditure at restaurants.

Australian economy to contract in 2020–21

Due to the COVID-19 pandemic, the Australian economy contracted by 6.4% for the June quarter 2020, reducing average economic growth over 2019–20 to –0.2%. Gradual easing of social distancing, improvements in consumer confidence and a consequent rise in economic activity are expected to result in GDP recovering in the first half of 2021. However, the economy is still assumed to contract by 3% in the 2020–21 financial year (see August 2020 Statement on Monetary Policy). Around 30% of Australian agricultural production is consumed domestically. Despite an anticipated 3% contraction in economic activity in 2020–21, overall demand for Australia's agricultural products is expected to remain relatively strong because food is an essential good.

Strong iron ore exports support appreciation of Australian dollar

The Australian dollar averaged US67 cents in 2019–20 and is expected to average US72 cents in 2020–21. This will make Australia's agricultural exports less competitive in global markets, and increase pressure on producers to reduce other costs.

The Australian dollar appreciated 17% against the US dollar between March 2020 and July 2020 due to rising iron ore prices and a depreciation of the US dollar. Rising iron ore prices have been the result of supply constraints in Brazil (the world's second largest iron ore exporter after Australia). Rising demand from China due to increased economic activity and government stimulus measures supporting steel demand has also led to rising iron ore prices. In addition, policy actions carried out by the US Federal Reserve in response to the COVID-19 pandemic have been a key factor in the depreciation of the US dollar.

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