The COVID-19 situation started off as a supply shock (i.e. less workers producing less output), and is flowing into a demand shock (i.e. people buying less and buying different things to what they normally purchase). Economic activity in accommodation and food services sectors will halve by June 2020 before a long recovery to their pre-COVID levels by March 2021. These reductions in demand have been countered to a degree by strong wholesale demand for agricultural products as major retailers service strong demand during the lockdown and continuing restrictions.
International demand has and will continue to be impacted in the short term as unemployment and uncertainty from COVID-19 reduces disposal income for premium Australian products. However, assessment of Australia’s top 10 agricultural markets (India, China, Indonesia, USA, Vietnam, Malaysia, Hong Kong, New Zealand, Korea and Japan) over the short to mid-term remains favourable, with income growth projected to increase marginally from 3.5 percent in 2020 to 3.7 percent in 2025.
The impact of COVID-19 on global trade has been immense, with total volume of world merchandise traded expected to fall 13-32 percent in 2020. This is a result of a general decline in business activity and consumer demand, diplomatic and trade tensions and the rise of associated protectionist policies (including tariff and non-tariff measures). Australian exports are estimated to fall 3 percent and imports by approximately 2 percent across 2020 with high value perishable and air freighted goods such as fresh meat, seafood, wine and grains taking a significant hit.
In response to COVID-19, a number of Australia’s key trading partners are implementing more protectionist trade agendas, standing up both tariff and non-tariff measures. In May 2020, China revealed it was applying a series of import tariffs on Australian barley (~80 percent) which is considerable, given China previously received 49 percent of Australia’s barley. China also announced it was suspending imports from four Australian meatworks in response to ‘technical breaches’ by Australian parties over the course of 2019. Regional trade for Australian seafood and aquaculture has also fallen, in response to disruptions to airfreight channels over 2020. ABARES predict this could wipe $389 million from the Australia’s seafood industry.
Australia’s future export growth will in part, be dependent on how our political relationship plays out with China and the speed at which the Chinese economy recovers. This will be particularly important for high-value food goods (seafood, fresh meat) and iron ore. Given our narrow export base and reliance on iron ore, swings in demand for this commodity could have a significant impact on our Terms of Trade in the near-term.
As global distribution systems (shipping and ports) continue to be disrupted, Australia may have issues accessing critical production inputs, notably packaging which could further affect our production and export capacity. Key agricultural inputs such as fertilisers, pesticides and labour may also be affected if regular trade flows do not resume. On a brighter note, trade volumes are expected to make a recovery in mid-2021, particularly for high value luxury goods (rock lobster and wine) as consumer confidence lifts and the impact of policy responses are felt.