Christopher Niesche: Why Australia's economy is so vulnerable to the coronavirus

Australian Prime Minister Scott Morrison. Photo / Getty Images

COMMENT:

When an Australian builder wants to put up a new block of apartments, they turn to China for the glass and steel and other construction materials.

When building gets underway, much of it can be done by Chinese labourers in Australia on temporary working visas.

Once the building is finished, and depending on where it is and the style, many of the buyers will come from mainland China.

There isn't an economy anywhere in the world that isn't reliant on China to some extent or another, both as a supplier of raw materials and finished goods. But not many countries also rely on China for labour and for consumption of their goods and services and this is what makes Australia so vulnerable to the coronavirus outbreak.

The University of Sydney is facing a $209.3m (A$200 million) budget hit as the virus prevents Chinese students coming to Australia. It has introduced a hiring freeze and put its capital works on hold for who knows how long.

This comes despite a warning a couple of years ago in a government-commissioned report that the higher education sector was too reliant on China and should make a concerted push into other markets such as India.

The lesson for the world, but Australia in particular, is to build redundancy into supply chains and have alternative suppliers and markets in those other than China. It also makes good strategic sense to be less reliant on an economy where the government is so heavy handed in its interventions to support Chinese enterprises – many of which it has an ownership stake in – at the expense of other nations' businesses.

That is a longer-term project for Australia, and in the meantime there is the immediate crisis to be dealt with.

Of course, coronavirus ceased to be a Chinese problem and because a global problem a couple of weeks ago, both because of the spill over from the economic disruption in China and increasingly from growing local infections.

The Morrison government feels there is a real risk of a recession and will this week launch a multibillion-dollar stimulus package aimed at shoring up the economy.

The Australian government expects the virus will have "a material impact on economic growth over the next two quarters". Given that Australia's economic growth has been so tepid in recent years – just 0.5 per cent in the December quarter – that impact won't have to be too large to bring on two negative quarters of growth, the technical definition of a recession and the first Australia has seen in 30 years.

The economic stimulus is expected to be aimed at small employers to help them free up cash and keep their staff. Tax breaks and investment incentives for businesses will be a big part of the mix.

Importantly, the investment tax breaks will be only temporary, with the idea that any business thinking about taking advantage of the investment incentive will have to do so straight away, thereby providing an immediate cash injection into the economy.

It will be a markedly different stimulus package to the 2008 cash handouts to consumers during the global financial crisis. Those were aimed at keeping consumer spending ticking over. This is a different sort of crisis.

Instead of a "demand shock" as so many past crises were, coronavirus will hit the supply side of the economy. There is little point in handing out cheques to shoppers if there's nothing for them to buy. Instead, the Australian government is trying to keep businesses ticking over.

Arguably, it's a better use of money than a cash splash, because investment by businesses should boost their productivity and pay dividends long after the crisis has passed, in the way that a new big screen TV in a shopper's living room never well.

(Of course, this assumes the Australian government will resist the temptation to throw money at voters.)

The stimulus package may also contain employment subsidies and tax cuts for businesses.

Support for business will be a start but it will also be very important to shore up the supply of credit to business.

If the banking system seizes up the crisis will be much more severe and long lasting. Once businesses can't get credit, the economy rapidly heads south, as we saw around the world with the credit crunch that accompanied the global financial crisis.

The government may want to introduce some sort of guarantee to back the banks and keep them lending.

The Morrison government has shown in the past that it is more than willing to uses government spending and fiscal policy as political weapons – witness its obsession with a budget surplus as a sign of good economic management or more recently the "sports rorts affair", where it targeted hundreds of millions of dollars in sporting club grants at marginal electorates during the last election.

We will need to hope that it puts the nation's interests ahead of its own during the current crisis.