Australia & New Zealand Economics

Extended travel ban threatens education exports

Australia & New Zealand Economics Weekly
Written by Ben Udy

Australia has extended its ban on travellers from mainland China until 22nd February. Given that many universities begin teaching again on 24th February, there is a growing risk that the travel ban may seriously damage education exports as well as tourism. That’s a downside risk to our forecast that Australian GDP growth averages 1.8% this year.

Travel ban extended until February 22nd

The ban on travel from China to Australia was set to end this weekend. But given the continued growth in infections of the coronavirus in China it has now been extended to 22nd February. That’s not particularly surprising and consistent with our estimate that the coronavirus-related disruptions will cause the economy to contract in the first quarter. (See here.)

While the ban only applies to mainland China, other areas appear to have been affected by the disruptions. Daily data on air travel from Hong Kong show that international departures of Hong Kong residents have fallen by more than 90% compared to mid-January. (See Chart 1.) Indeed, we wouldn’t be surprised if the coronavirus weighed on travel exports to all of Asia. Travel exports to Asia (ex-China) account for more than 1.5% of GDP.

Chart 1: Passenger Departures from Hong Kong (Hong Kong Residents, thousand, NSA)

Source: Refinitiv

The longer the ban stays in place the larger the risk to education exports. The Australian Department of Education reports that 28% of all international students in Australia are from China. Indeed, education exports make up 72% of total travel exports to China. The initial travel ban is unlikely to have had any impact on education imports as university students are still on their summer break. However, with classes due to begin at many universities on 24th February, the new extension cuts it fine. And any further extension would force students to miss at least the first week.

There are some alternative options available, including online teaching. But there’s a mounting risk that many students choose to delay study or study in other countries. That would mean the disruptions weigh on growth throughout 2020, not just in the first quarter.

What’s more, Australia now has 15 domestic cases of the coronavirus so there’s a risk that consumer confidence slumps and retail spending slumps. As such, consumption growth may be even weaker than the below-consensus 1.5% increase we expect this year. (See here.) On that basis, any further extension of the travel ban will add downside risk to our forecasts for growth in Australia to average 1.8% this year.

RBNZ is done cutting

As widely expected, the RBNZ left rates on hold this week. (See here.) And there are a couple of reasons why we think the Bank is now done cutting rates. Admittedly, we think that the coronavirus will result in falling GDP in Q1. But we expect the recent surge in house prices alongside stronger consumer confidence to lift consumption growth before long. And the government’s plans to ramp up infrastructure spending are an upside risk to our forecast of a gradual pick-up in business investment this year. (See here.) Add in the fact that the RBNZ now thinks employment may be above its maximum sustainable level and we think the Bank is done cutting rates.

The week ahead

We think wage growth remained subdued at 2.2% in Q4. And a renewed rise in the unemployment rate to 5.2% in January would keep downward pressure on wages for some time.


Data Previews

Australian Wage Price Index (Q4) Wed. 19th Feb.

Forecasts

Time (AEDT)

Previous

Consensus

Capital Economics

Wage Growth

11.30

+0.5%(+2.2%)

+0.5%(+2.2%)

+0.5%(+2.2%)

Wage growth remains subdued

We suspect that annual wage growth remained unchanged at 2.2% in the fourth quarter of 2019. And we expect a renewed rise in the unemployment rate to cause wage growth to ease further in the coming quarters.

The unemployment rate declined a little at the very end of last year. Even so, we think the spare capacity in the labour market throughout 2019 will keep wage growth subdued in Q4. (See Chart 2.) We expect quarterly wage growth to remain unchanged at 0.5% in Q4.

What’s more, we expect the unemployment rate to rise further to 5.5% by the middle of this year. That further increase in the degree of spare capacity in the labour market will place additional downward pressure on wage growth.

Chart 2: Underutilisation & Wages

Sources: Refinitiv, Capital Economics

Australia Labour Market (Jan.) Thu. 20th Feb.

Forecasts

Time (AEDT)

Previous

Consensus

Capital Economics

Change in Employment

11.30

+28,900

+10,000

+5,000

Unemployment Rate (%)

11.30

5.1%

5.2%

5.2%

Unemployment rate will probably rebound

Employment growth has remained remarkably resilient in recent months, rising by 28,900 in December. Even so, we suspect that strength won’t be sustained and the bushfires in January are unlikely to have helped things either.

Our forecast for a 5,000 rise increase in employment would be consistent with the annual growth rate of employment falling from 2.1% to 1.8%, the weakest pace of growth in nearly 3 years. Assuming no change in the participation rate, that would result in the unemployment rate rising to 5.2%.

Indeed, forward indicators are generally consistent with our expectation of a renewed rise in the unemployment rate in the coming months. Our composite measure of jobs vacancies still points to rising unemployment. And households continue to expect the unemployment rate to pick up this year. (See Chart 3.)

Near term disruptions including the bushfires and the coronavirus may cause some loosening in the labour market in Q1. But ultimately our expectation that the unemployment rate will rise is driven by the weakness in underlying economic growth.

Chart 3: Unemployment Rate & Unemployment Expectations

Source: Refinitiv


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time AEDT

Time (NZDT)

Previous*

Median*

CE Forecasts*

Mon 17th

NZ

BusinessNZ Performance of Services Index (Jan.)

08.30

(10.30)

51.9

NZ

Net Migration (Dec.)

08.45

(10.45)

2610

Tue 18th

Aus

RBA Minutes (Feb. Meeting)

11.30

(13.30)

Wed 19th

Aus

Westpac Leading Index (Jan.)

10.30

(12.30)

+0.1% (-0.2%)

Aus

Skilled Vacancies (Jan.)

11.00

(13.00)

+0.6% (-7.9%)

Aus

Wage Price Index (Q4, q/q(y/y))

11.30

(13.30)

+0.5% (+2.2%)

+0.5% (+2.2%)

+0.5% (+2.2%)

Thu 20th

NZ

PPI Input (Q4., q/q(y/y))

08.45

(10.45)

+0.9% (+2.0%)

NZ

PPI Output (Q4., q/q(y/y))

08.45

(10.45)

+1.0% (+1.8%)

Aus

Change in Employment (Change in 000s) (Jan.)

11.30

(13.30)

28.9k

10.0k

5.0k

Aus

Unemployment Rate (Jan.)

11.30

(13.30)

5.1%

5.2%

5.2%

NZ

Household Inflation Expectations (Q1)

13.00

(15.00)

(+1.7%)

Fri 21st

No Significant Data Released

Selected future data releases and events

24th Feb

NZ

Real Retail Sales (Q4)

27th Feb

Aus

Private Capital Expenditure (Q4)

3rd Mar

Aus

RBA Policy Announcement

25th Mar

NZ

RBNZ Policy Announcement

*m/m(y/y) unless otherwise stated; p=provisional estimate

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q(%y/y) unless stated

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Q2 2020

2019

2020

2021

Australia

GDP

+0.5(+1.7)

+0.6(+1.6)

+0.4(+1.7)

+0.5(+2.0)

-0.1(+1.4)

+0.9(+1.7)

(+1.8)

(+1.8)

(+2.6)

CPI Inflation (nsa)

(+1.3)

(+1.6)

(+1.7)

(+1.8)

(+1.9)

(+1.6)

(+1.6)

(+1.6)

(+1.4)

Core CPI Inflation1 (nsa)

(+1.3)

(+1.5)

(+1.9)

(+1.7)

(+1.9)

(+1.7)

(+1.6)

(+1.5)

(+1.4)

Unemployment Rate (%)

5.0

5.2

5.2

5.2

5.3

5.5

5.2

5.5

5.4

RBA Cash Rate, End Period (%)

1.50

1.25

1.00

0.75

0.75

0.50

0.75

0.25

0.25

US$/AUS$, End Period

0.71

0.70

0.67

0.70

0.67

0.66

0.70

0.65

0.67

New Zealand

GDP (production basis)

+0.4(+3.0)

+0.1(+2.1)

+0.7(+2.3)

+0.4(+1.6)

-0.1(+1.2)

+0.8(+1.9)

(+2.2)

(+1.7)

(+2.8)

CPI Inflation (nsa)

(+1.5)

(+1.7)

(+1.5)

(+1.9)

(+2.2)

(+2.1)

(+1.6)

(+2.0)

(+1.7)

Core CPI Inflation1 (nsa)

(+1.5)

(+1.7)

(+1.8)

(+2.0)

(+1.9)

(+2.0)

(+1.7)

(+1.8)

(+1.5)

Unemployment Rate (%)

4.1

4.0

4.1

4.0

4.3

4.4

4.1

4.4

4.3

RBNZ Cash Rate, End Period (%)

1.75

1.50

1.00

1.00

1.00

1.00

1.00

1.00

1.00

US$/NZ$, End Period

0.68

0.67

0.62

0.67

0.66

0.66

0.67

0.65

0.67

Aus$/NZ$, End Period

0.96

0.96

0.93

0.96

0.99

1.00

0.96

1.00

1.00

Sources: Bloomberg, Capital Economics; 1Excludes food, household energy and vehicles fuel.


Ben Udy, Australia & New Zealand Economist, +65 6595 1517, ben.udy@capitaleconomics.com

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