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Is Australia still the lucky country?

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

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When Tourism Australia proudly released its A$15 million “Matesong” TV ad campaign on Christmas Day, I doubt anyone expected it would be pulled from our screens less than a fortnight later.

Within days of its launch images of devastating, deadly bushfires began to cast a long shadow over the three-minute commercial designed to temporarily transport British poms away from the winter gloom.

US Defense Secretary Donald Rumsfeld famously warned of “known knowns”, “known unknowns” and the “unknown unknowns” when questioned about Iraq’s involvement in weapons of mass destruction in 2002.

While the annual threat of bushfires could be perceived as a “known known”, the Australian tourism economy has now been hit a double blow by the outbreak of the Covid-19 coronavirus, a definite “unknown, unknown” just a few weeks ago.

China is both Australia’s largest trading partner and largest tourism market, accounting for 1.5m short-term arrivals in the year to June, as reported in the Financial Times.

News then that the Australian government’s travel ban on people who have travelled through China - which was due to expire tomorrow, but has now been extended by another week - only heightens the impact the virus will have on the Australian economy. Prime minister Scott Morrison said the ban would be reviewed each week, so for now, it will be difficult for investors to predict the full effect this will have on the economy.

Australia’s geographic location makes it extremely well placed to serve the emerging and growing markets of Asia. Beneath the ground lies large stretches of iron ore and coal that have been the raw materials behind China’s long economic boom. Above ground are the wheat and cattle that have helped feed China’s rapidly growing middle-class population.

As a result, the country has enjoyed nearly 30 years of uninterrupted growth. A whole generation of Australians have grown up without ever experiencing an economic recession, which is defined as two consecutive quarters of negative growth. The last time two quarters of negative growth was recorded was March and June 1991.

But it’s not just the tourist sector that will be hit by the lack of Chinese visitors. Chinese students are also a major source of income. According to the latest figures from the Australian Bureau of Statistics, in 2017-18 international education contributed A$32 billion to the Australian economy annually. A quarter of the University of Sydney’s income, for example, comes from Chinese students.

According to the International Education Association of Australia, half of the approximate 200,000 Chinese students due to begin studies this month remain stranded at home, which could mean a A$8bn hit to the Australian economy if they cannot attend the new term.

As a result of lobbying from the education sector, China has agreed to relax its internet restrictions so Chinese students can study online during the time they are unable to enter Australia.

While a thawing in the US/China trade war has helped boost the US dollar this year, the Australian dollar remains close to a near-decade low against the greenback.

The Reserve Bank of Australia has already cut interest rates three times in 2019 to a record low of 0.75%. Earlier this month the Bank kept interest rates on hold saying a “soft patch in growth is likely to extend into early 2020 because of the ongoing drought, the effects of the bushfires, and the effects on Australian exports of the recent outbreak of a new coronavirus in China.”

However, it added that the medium-term outlook is “broadly unchanged from three months ago”.

With the UK keen to secure trade deals outside the European Union as quickly as possible, it will be interesting to see if an early trade deal is secured with Australia, enabling the ‘Lucky Country’ to be a little less dependent on China.

In 2019, trade between the UK and Australia was worth £18.3bn, according to the Foreign and Commonwealth Office, a fact not overlooked by UK Foreign Secretary Dominic Raab. Earlier this month he met his counterpart Marise Payne in Canberra to discuss what Mr Raab described as a potential “win win” deal for both countries.

With data this week revealing coronavirus cases rapidly rising in China, we may see an increased determination from Australia to secure a trade deal with the UK, a prospect which a few weeks ago may have been considered an “unknown unknown”.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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