Coronavirus to Disrupt Construction Supply Chains

Economists are looking to the Japan earthquake and tsunami of 2011 to help quantify the potential impact of the coronavirus, particularly when it comes to Australia's building and construction supply chains.

And while data-wise it seems we’re in for an “ugly few months”, the outlook isn’t as bleak as it seems, according to BIS' head of macroeconomics Sarah Hunter.

Speaking at The Urban Developer's market outlook event on Friday, Hunter said that the coronavirus outbreak has forced economists to revise what might have otherwise been a “pretty optimistic” picture of 2020.

“It seems a bit random, a bit left-field…but [Japan's earthquake] was an exogenous shock to an economy that shuts down production completely for about a month or so, which is more or less what Covid-19 has done in China—so it’s not as crazy as it sounds as a benchmark,” Hunter said.

With construction supply chains in Australia already feeling the pinch due to factory closures in china, where many building materials used in Australia are sourced, Hunter said an analysis of the severe impact of the Japan event on the “phenomenally complex" sector of car production supply chains was instructive in gauging the current state of play.

“As soon as you rock one bit of [the car production supply chain], the whole thing tends to grind to a halt,” Hunter said.

"The most exposed regions in terms of geography and production levels are in Asia, so [that's where] we’re going to see the biggest impacts of this, we think,” Hunter said.

Hunter said it was relevant to compare how other aspects of Japanese industrial production fared in the aftermath of the earthquake and subsequent tsunami that occurred off the northeastern coast of Japan's main island, Honshu.

While industrial manufacturing "took a hit, no doubt"—not as dramatic as car production, but still down 15 per cent peak to trough—the key takeaway was a positive one.

“The thing we learnt [from Japan] and the thing that we’re now starting to think about in the context of our forecasts is that recovery takes time.

“It’s not enough just to restart production and we all bounce back to normal in a week—it actually takes months for things to fully be normalised.

“So what we should expect to see is that big sharp drop—we’ve already seen that in China we’ll see that elsewhere—and then it will be a slow-ish recovery,” Hunter said.

▲ Economists are looking to the Japan earthquake and tsunami of 2011 to help quantify the potential impact of the coronavirus on Australia's building and construction supply chains.
▲ Economists are looking to the Japan earthquake and tsunami of 2011 to help quantify the potential impact of the coronavirus on Australia's building and construction supply chains.

Commbank’s China economist Kevin Xie said that with the latest Chinese data on COVID-19 infections suggesting authorities are containing the disease, daily indicators such as property sales, road traffic flows and coal consumption show an economic recovery has started.

“We retain our view of a sharp but temporary hit to the Chinese economy,” Xie said.

With the global spread of the virus, Hunter anticipates that in Australia, that recovery and normalisation won’t occur the second half of this year.

“We should expect to see here [in Australia] some of the supply chain impacts will start to pinch now, they’re going to likely pinch until we get to June—maybe even July-August—then it’ll be back to normal.”

The impact of coronavirus already being felt in the tourism and education sectors, along with supply chain disruption, means we’re in for an “ugly few months” in terms of economic data, while the world awaits the turnaround of the Chinese economy.

“There’s just no two ways around it, if you chop off tourism you chop off education and you throw some supply chain disruptions into the mix it’s very hard for the economy to grow. It’s as simple as that.”

However, Hunter insists the anticipated negative growth for the quarter is “nothing to panic about”, with some normalisation of supply chains and travel movements anticipated, which will help lift growth going into the second quarter.

While a direct response to the coronavirus is “unlikely” when the Reserve Bank meets on Tuesday, it was expected to influence measures aimed at helping boost confidence in business investment decisions.

“So, we do think they’re going to cut the cash rate again, to support the economy and get us through the very rocky ride that we’ve got for the start of this year.”


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Article originally posted at: https://www.theurbandeveloper.com/articles/coronavirus-construction-supply-chain-impact