What a difference a year makes

This article features excerpts from Chapter 1 of the ANZ Opportunity Asia Report 2020 exploring the post-COVID-19 landscape, some key lessons and why Australia is well positioned to weather the storm.

ROAD TO RECOVERY

While the impact of the pandemic has been felt across the entire economy, some businesses in Australia have been able to continue trading normally. There are initial signs of business conditions starting to improve across a variety of aspects, in-line with the gradual rollback of COVID-19 restrictions.

The positive improvements are noted first in wholesale trade, manufacturing, construction and retail, with recreation and personal services showing a slower recovery.(4) The ANZ-Roy Morgan Consumer Confidence Index indicated that confidence is progressively improving since the low point in March when fears about the pandemic were at the most extreme. ANZ Head of Australian Economics, David Plank, commented:

“While still below average, sentiment has recovered strongly from its March low. Government measures and signs that the job market is stabilising seem to be playing a key part in the recovery of the index despite recent concerns over trade with China and weak retail sales.”

Industry experts cite Australia’s high quality, safety standards and brand image as factors that will continue to support strong consumer demand for Australian products over time.(6) The Export Council of Australia share a similar view that Australia, in comparison to other markets, is well positioned in the long term, supported by generous stimulus packages by the Government and existing links to Asia.(7) While economies around the world recover during 2021, our closest trading partners throughout Asia may provide the strongest opportunities for Australia to recover faster than other western economies.

International trade has always played an essential role in Australia’s economy. According to Australia’s Department of Foreign Affairs and Trade (DFAT), it represents around 45% of Australian GDP. International trade has also created many job opportunities as one in five jobs in the Australian economy is directly related to cross border trade activities.(8)

“Getting our export sector back on its feet is crucial to reduce job losses through the crisis and a critical part of the ultimate economic recovery.”

-Australian Trade Minister Simon Birmingham(9)

ASIA DEMAND

Many Southeast Asian countries have been managing the COVID-19 crisis relatively well, avoiding the large scale infections of Europe and the United States. The Australian Chamber of Commerce in ASEAN noted the cross border trade with Australia remained priority in the region. In its recent Australian Business in ASEAN survey 2020(12), President Chau Ta stated:

“Given the current global situation, it is imperative that we ensure ASEAN markets remain as open as possible for Australian business. I was pleased to read the Declaration made by the ASEAN Leaders at the Special ASEAN Summit on COVID-19 on 14 April 2020. This commitment to keeping ASEAN’s markets open for trade and investment, preserving supply chain connectivity and refraining from imposing unnecessary restrictions on trade and investment are all critical going forward.”

Maintaining strong relationships and up-to-date market knowledge are key drivers of success in uncertain times. Our study suggests that good relationships with partners and customers, and understanding of the market are amongst the top elements that have underpinned success for Australian businesses that are already active in Asia. These key drivers remain relevant in the post-COVID-19 world, and in fact even more important in the new environment where travel is restricted and many activities are conducted remotely. Key contacts can serve as reliable sources for up-to-date market information on the ground and can help prepare a business for any changes ahead.

KEY MARKET FOCUS OR DIVERSIFICATION?

Disruption to international trade during 2020 has highlighted the risks a business may face due to exposure to a single market, along with the challenges and costs of operating in different ones at the same time. As the pace of Australian export and import activity recovers, it may be an opportunity to consider various markets in Asia.

Based on recent IMF’s forecast of real GDP growth, most of the advanced economies such as Australia, New Zealand, the United Kingdom and the United States will experience negative growth in 2020 while some of Asia’s emerging economies may maintain positive, although subdued growth.(13) This is partly driven by the underlying strength of domestic consumption and relatively less reliance on inbound tourism.

It is worth noting that many Asian businesses have navigated through a number of crises over the years such as the Asian Financial Crisis in 1997, SARS in 2003 and the GFC in 2008 to rebound strongly. The region’s dynamic development and constantly changing consumer demands have prepared those who operate in Asia to be agile and resilient. It is expected that the economies of many Asian nations will recover from COVID-19 and move to regular levels of consumption again. The graph below maps out some key Asian economies based on population and real GDP growth in 2019, and the arrows indicate the magnitude of economic contraction projected by the IMF in 2020.

EMERGING MARKETS IN ASIA

As shown in the graph above, alongside China, some Asian emerging economies will remain within the high growth and high population quadrant, which presents favourable conditions for Australians to trade and invest in. This is further supported by our studies over the years which revealed that the ASEAN region is a popular trade and investment destination, consistently ranked highly, similar to the Greater China region.

Australia’s complementary economy together with proximity to the ASEAN region strongly supports trade with the combined population of almost 700 million consumers. Australia’s agricultural exports to ASEAN were around AUD $9 billion in 2018-19, compared to similar exports to China at AUD $12.3 billion in the same period. ANZ Agribusiness Research noted modelling of population growth and rapidly rising ASEAN income trends suggested total agricultural commodity consumption in the region growing to 285 million tonnes by 2024-25, a jump of 28% since 2016-17.(15)

Vietnam, Philippines and Indonesia are good examples of strong economies with huge populations within the region. Vietnam, in particular stands out to be one of the few nations that is projected to achieve positive growth in 2020, and notably higher than China and India. Vietnam has benefited from trade liberalisation and a series of economic and political reforms over the years which have yielded a solid level of GDP growth, averaging at 6.6% per annum over the past 30 years.(16) Prior to COVID-19, this Southeast Asian country had already seen a large shift of international brands such as Samsung for its smartphones and Nike for its sportswear moving their Chinese manufacturing to Vietnam. This is expected to increase post-COVID-19 as 87% of global companies are reportedly considering changing their globalisation strategies and diversifying their supply chains across countries as their top priorities after lessons learned from the pandemic.(17)

Diversifying into multiple markets may help to reduce business risks as the customer base and supply chains are not concentrated in the same region, which may be prone to unexpected events such as natural disasters, economic shocks and political events. Operating in multiple markets brings increases in complexity, due to differences in compliance and regulations. However this can be mitigated by leveraging relationships in international trading hubs that have extensive experience, such as Singapore and Hong Kong.

TRADE BARRIERS

During the global pandemic, trade barriers have been heavily discussed, as major economies face pressure to prioritise domestic economy and employment over international trade.(18) Despite occasional geopolitical challenges, Australians have been largely supportive of the contribution of free trade and globalisation to the country. The Lowy Poll update in May 2020 indicated that 70% of respondents believe globalisation is ‘mostly good for Australia’, falling only 2 points from the 2019 overall result.(19)

Some experts also believe that Australia should continue to remove trade barriers, to accelerate productivity, exports and national income growth. Australia experienced this in the 1980s and 1990s, and that proved successful when it grew Australia’s total export grew at a trend rate of 6.9% in the 10 years to 1994-95, almost double of the previous 10 years.(20) Despite ongoing trade tension in some parts of the world, Australia has already resumed negotiations of a new trade agreement with the United Kingdom and has concluded the Australia-Singapore Digital Economy Agreement and Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA).(21)

These agreements will support Australian businesses to participate and benefit from cross border trade. It is clear that there is a lot to gain through international trade and this will play a critical role in helping the nation to recover from the pandemic. If Australian businesses can formulate a robust plan to manage both the domestic and international business, we will be well positioned to bounce back quickly. 

Visit ANZ Be Trade Ready to download the full report

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Reference Links:

1 Austrade. “Why Australia” https://www.austrade.gov.au/International/Invest/Why-Australia/Robust-Economy/robust-economy

2 The International Monetary Fund. “‘World Economic Outlook Update, June 2020: A crisis like no other, an uncertain recovery”

https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020

3 ABS. “Business Indicators, Business Impacts of COVID-19” https://www.abs.gov.au/ausstats/abs%40.nsf/mediareleasesbyCatalogue/49F8475B31112582CA25853600764041?OpenDocument

4 ANZ Research. “Australian business conditions and confidence past their low point”

7 The Age. “Macquarie CEO says Australia is well placed to weather economic crisis” https://www.theage.com.au/business/banking-and-finance/australia-well-placed-to-weather-economic-crisis-says-macquarie-ceo-20200505-p54pvh.html

7B The Sydney Morning Herald. “Australian exporters given $500m lifeline” https://www.smh.com.au/politics/federal/australian-exporters-given-500m-lifeline-20200414-p54jn6.html

8 Australia’s Department of Foreign Affairs and Trade. “Trade and investment at a glance 2020” https://www.dfat.gov.au/sites/default/files/trade-investment-glance-2020.pdf

9, 10 Australian Trade Minister. “Securing freight access for Australian agricultural and fisheries exporters” https://www.trademinister.gov.au/minister/simon-birmingham/media-release/securing-freight-access-australian-agricultural-and-fisheries-exporters

11 ANZ Research “Australia: not a record trade surplus, but still very strong”

12 Australian Business in ASEAN Survey 2019 Report, AustCham ASEAN, https://austchamasean.com/what-we-do/business-surveys/

13 The International Monetary Fund. “‘World Economic Outlook Update, June 2020: A crisis like no other, an uncertain recovery” https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020

14 Australia’s Department of Foreign Affairs and Trade. “Trade and investment at a glance 2020” https://www.dfat.gov.au/sites/default/files/trade-investment-glance-2020.pdf

15 Ag options in ASEAN beckon, Stock Journal, May 2020

16 PricewaterhouseCoopers. “Spotlight on Viet Nam” https://www.pwc.com/vn/en/publications/vietnam-publications/spotlight-on-vietnam.html

16B Australia’s Department of Foreign Affairs and Trade “Trade and Economic Fact Sheets – Vietnam” https://www.dfat.gov.au/trade/resources/Pages/trade-and-economic-fact-sheets-for-countries-economies-and-regions#v

17 McKinsey. “Economic Conditions Snapshot, March 2020: McKinsey Global Survey results” https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/economic-conditions-snapshot-march-2020-mckinsey-global-survey-results

18 ANZ BlueNotes. “Globalisation goes back to the future” https://bluenotes.anz.com/posts/2020/06/alan-mitchell-column-covid19-deglobalisation-trade-economy;

18B Asialink Insights. “Perspectives: Deglobalisation, Authoritarianism and Asia’s Post-Virus Future” https://asialink.unimelb.edu.au/insights/deglobalisation,-authoritarianism-and-asias-post-virus-future

19 COVIDPOLL: Lowy Institute Polling On Australian Attitudes To The Coronavirus Pandemic, May 2020 https://www.lowyinstitute.org/publications/covidpoll-lowy-institute-polling-australian-attitudes-coronavirus-pandemic

20 ANZ BlueNotes. “Globalisation goes back to the future” https://bluenotes.anz.com/posts/2020/06/alan-mitchell-column-covid19-deglobalisation-trade-economy