You couldn’t paint a worse picture for a resource-dependent economy. 2020 was the year when a microscopic villain barricaded borders worldwide. The resulting plunge in economic activity caused real estate and infrastructure projects to slow across the globe.
For those concerned with Australia trade, this was horrible news. Suddenly, this country found themselves grappling with the consequences of dramatically lower demand for their #1 export – iron ore.
Nonetheless, the economy kept turning – albeit, in fits and starts. In this report, we’ll discuss the performance of Australia’s exports and imports thus far in 2020.
What Did Australia Export in 2020?
The fortune of export to Australia has varied widely by industry. Most recently, non-monetary gold exports tanked 62% month-over-month in August.
The agriculture sector has also been struggling, despite producing food for a world stuck at home. Cereal grain exports are roughly unchanged compared to 2019, while meat shipments are forecast to plunge by 23%.
On the other hand, China’s post-COVID economic recovery has shored up demand for raw materials like iron ore. After a sharp decline at the start of 2020 due to COVID, iron ore has enjoyed a V-shaped recovery.
As of September 2020, it appears iron ore exports hit an annualised rate of 100 billion AUD – a significant milestone. This lone bright spot has lifted 2020 exports upward in an unbroken line, even as the broader economy struggles.
However, when it comes to the value of Australian exports, drastically lower prices mean year-end results will be disappointing. In 2019-2020, Australia exported 290.4 billion AUD worth of goods. According to revised forecasts, they will be lucky to hit 256.4 billion AUD in 2020-2021. That’s a drop of 11.7% – a far cry from last year’s numbers.
What Did Australia Import in 2020?
Imports to Australia got walloped as COVID-19 sent Australians into lockdown. By May 2020, imports fell to seven-year lows. However, in recent months, a sharp recovery has occurred, despite Victoria going back into lockdown.
According to the most recent figures, total imports to Australia have rebounded by more than 10% from their 2020 low point. Consumption goods have led the way, with imports up more than 30% from May 2020. These items include things like clothes, books, toys, and other leisure goods.
The lifting of regional lockdowns also spurred the growth of fuel imports. Compared to their May 2020 low point, the importation of petrol has surged almost 40%. However, news surrounding imports wasn’t all good – importation of capital goods (i.e. equipment used to produce other goods) sank about 15% YoY.
All in all, imports to Australia were 2.4% lower YoY – not a bad result, considering what 2020 has thrown at this nation.
The Impact of COVID-19 on Australian Exports & Imports
As we mentioned earlier, COVID’s impacts on Australia trade vary greatly by sector. For instance, the agricultural sector has weathered the storm well (foreign exports excepted). Food commodities are essential to everyday life, even during a crisis. At worst, prices have softened, but domestic demand, generally speaking, has remained stable.
However, Australia’s resource industries have fared the best by fare. China was the first nation to experience the effects of COVID-19. As a result, they were the first to emerge from its initial wave. To kick start their economy, Beijing is implementing aggressive stimulus measures.
Because of this, demand for raw materials has surged back to life after plunging early in 2020. Back in February, iron ore exports plunged to 66.01 billion AUD. However, by June, those exports skyrocketed 50% to 99 billion AUD.
Then, we have the travel sector. Throughout the world, the spread of a lethal virus has made international travel a non-starter for most people. In Australia, the government has compounded this issue by imposing draconian measures.
The federal government hasn’t just banned discretionary travel into the country – they’ve barred outbound travel as well. The coup de grace – many state authorities have imposed internal travel restrictions. The result? Many tourism operators have reported revenue drops of 80-90% YoY. Were it not for government bailout programmes, most would have gone out of business by now.
COVID impacts on secondary industries (i.e. manufacturing) have also hurt machinery imports. Known in economics-speak as capital goods, the value of these imports fell 15% YoY. However, more significant is the inability of manufacturers to spur economic growth, thanks to reduced spending on machinery.
Impacts on the Money Transfer Industry
These impacts have also severely affected the service economy. In particular, business foreign exchange transactions have been hard hit. With businesses processing fewer orders across international borders, money transfer providers are bringing far less in commissions.
Currency fluctuations have only compounded their misery. The AUD has not done well in 2020 global currency markets. Among advanced economies, only the CAD has taken a worse beating. As a result, it now takes more AUD to conduct transfers to UK and elsewhere.
Consequently, capital outflows have gotten progressively worse. In Q2 2020, 18.63 billion AUD flowed out of Australia. These numbers could be why some are sitting by, waiting for AUD exchanges rates to improve. This hesitance to trade is only further hurting Australian transfer providers, who have suffered mightily this year.
Why Australia Still Has a Positive Trade Balance
Things were looking dire at the start of the pandemic. As China locked down hard, the unthinkable happened – its powerhouse economy ground to a halt. Consequently, exports of iron ore, Australia’s highest value commodity, tanked by nearly 30% from December 2019.
And yet, as we write this article, this nation has somehow managed to maintain a positive trade balance. As we inferred earlier, iron ore has played a big role in Australia’s post-lockdown recovery. The mining sector comprises 9.5% of Australia’s GDP – so, when iron ore came back to life, so did this nation’s fortunes.
Trouble does appear to be on the horizon (i.e. impacts of a 2nd wave), but the mining industry has single-handedly boosted the Australia trade surplus. When you compare the first eight months of 2020 to the same period in 2019, this figure expanded 20% YoY.
We can thank Asia’s alpha tiger for this remarkable turnaround. After emerging from lockdown, China’s economy returned to life fairly quickly. After contracting at an annualised rate of 6.8% in Q1 2020, they posted GDP increases of 3.2% and 4.9% in Q2 and Q3 respectively.
According to S&P Global Market Intelligence, both industrial production and real estate investment have experienced V-shaped recoveries. Both sectors make use of copious amounts of iron ore, which explains Australia’s exports resurgence.
Australia exports 80% of its iron ore to China. While its dependence in Beijing is troubling, this relationship is mostly responsible for this nation’s trade balance recovery.
Looking Ahead to 2021
Like other nations around the world, prospects for 2021 depend on how the COVID situation plays out. If researchers develop a workable vaccine, pent-up demand could lead to a robust year, especially in the second half.
However, if COVID stays with us, economic stagnation is the best-case scenario. As government balance sheets strain under the weight of stimulus measures, pressure to end them will mount. If the Australian government rolls them back before the pandemic is over, severe economic pain will result.
Australia Remains Strong, Despite the Current Situation
Things could be worse. While international money transfers in Australia are floundering due to COVID, iron miners are keeping this nation afloat. Currently, there is discussion that several vaccine candidates may be ready soon.
Let’s hope things work out.