China tariffs will hinder SA economic recovery

University of Adelaide economists expect the South Australian economy will continue to bounce back in 2020/21. However, economic recovery will be weaker than previously thought as a consequence of China’s decision to escalate its trade war with Australia, the outbreak of a second COVID-19 wave in the northern hemisphere, and South Australia’s own mini lockdown in November.

These conclusions are contained in the latest Economic Briefing Report prepared by the SA Centre for Economic Studies (SACES). Their report highlights:

• Australian economy is still in recession
• South Australian economy shrunk for the first time since the early 1990s recession
• Economic activity and employment have recovered much of their pandemic losses but remain relatively weak
• Premature withdrawal of government support could increase business failures and unemployment
• One-eighth of South Australia’s overseas merchandise exports may be at risk of China retaliatory measures
• Upcoming winter crop looks strong

“The external environment for South Australia remains quite challenging. Both the global and national economies remain in recession even though economic activity bounced back strongly following the lifting of stringent lockdown measures,” says Mr Steve Whetton, Deputy Director, South Australian Centre for Economic Studies, the University of Adelaide.

“The pandemic has essentially wiped out several years of economic growth for Australia. Major components of activity such as household consumption, business investment and exports remain below their pre-pandemic levels.

“Employment also remains below its pre-COVID trajectory in spite of a strong rebound over recent months and considerable government support.

“The scale of the fall in GDP and significant ongoing weakness in underlying labour market conditions suggests that the recession will last for some time. The Commonwealth should consequently rethink its moves to prematurely end existing supports as doing so could see significant increases in business failures and associated job losses.”

Economic recovery in South Australia was, if anything, progressing a little more quickly compared to the national average until the short ‘circuit breaker’ lockdown in November. Prior to this episode, employment levels had recovered most of their pandemic losses and the unemployment rate had converged with the national rate for the first time since 2011. Fortunately the lockdown was only brief, which means that any fallout should be limited, representing only a temporary setback to recovery.

“Of much greater concern for the state’s economic outlook is China’s recent move to impose massive tariffs on Australian wine which will cause considerable disruption to the local viticulture and wine making industries, reducing their production and employment in the short to medium term,” says Mr Whetton.

“China accounts for almost half of South Australia’s overseas exports of alcoholic beverages and has been the main source of wine export growth over recent years.

“Taking into account other commodities that have been subject to China’s arbitrary trade barriers, in the order of one-eighth of South Australia’s overseas goods exports could be at risk of China’s trade measures.”

In spite of this gloomy development, there are some positives.

“Most significantly, vaccines have now started to be distributed, providing greater confidence that the pandemic can be overcome,” says Mr Whetton.

“Economic recovery will be supported by the increasing normalisation of economic and social activity around Australia,”

“The outlook for the farm sector’s winter crop is quite bullish given favourable seasonal conditions.

The full Economic Briefing will be delivered to South Australian business leaders at a virtual presentation this Friday, 18 December.

To receive email updates when articles are posted to the SACES Economic Policy Forum, please sign up through the front page.