What will a covid-19 less economy look like? How can we make a prediction using exports?
The economic commentary before the COVID-19-induced recession was cautiously optimistic given the global trade uncertainties of Brexit and the US-China trade dispute - such trade uncertainties cause vulnerability in Australia’s export-reliant economy.. Furthermore, the Reserve Bank of Australia’s (RBA) economic outlook for 2020 warned against reduced productivity from unreliable exports, and a general pessimism around asset markets such as the Australian Securities Exchange.
A counterfactual economy without COVID-19 predicts real GDP growth close to zero, reflecting the trade uncertainties Australia faces via exports. As demonstrated in various studies, exports are seen to be a pro-cyclical indicator for the Australian economy. Additionally, the volatility around trade uncertainty can potentially lead to negative real GDP growth and - ultimately - a recession. Here, a recession is defined as a period of at least two consecutive quarters of negative growth in real GDP (RBA).
Studying exports as a pro-cyclical indicator
Since Australia’s trade balance is in favour of exports and ‘being the world's largest exporter of iron ore’ (
DFAT), it makes logical sense to study the relationship between changes in Australian exports and real GDP. The figures below show real GDP and exports on a logarithmic scale on a quarterly basis. Both variables are seasonally adjusted.
The above table shows the mean, standard deviation for the quarterly logarithmic and the difference in quarterly logarithmic values for growth in both exports and real GDP. The significant statistic is the correlation between the logarithmic values for exports and real GDP being 94.2%. The positive correlation shows that exports are a pro-cyclical macroeconomic variable. This relationship can then be used in constructing Australia’s COVID-19-less counterfactual economy.
The above Stata output confirms the strong relationship that exports are statistically significant in influencing real GDP - an increase in exports by 1 percent is attributed to an increase in real GDP by 41%, ceteris paribus. A study investigating whether Australian business cycles were influenced by international economic shocks found that they are ‘responsible for around half of all Australian business cycle fluctuations’ (Cross & Poon, p. 2629). Thus, exports as an asset - particularly commodities as an asset - influence Australian real GDP and are heavily affected by economic shocks from outside Australia.
A simple forecast of Australia’s COVID-19-less economy
Since exports and real GDP are highly correlated, utilising Australia’s main COVID-19 export forecasts for 2020 can highlight pre-pandemic expectations. Forecasts developed before nationwide lockdown by the Office of the Chief Economist at the Australian Government’s Department of Industry, Innovation and Science show low positive and even negative export levels throughout 2020 and into 2021 growth. Figure 5 graphically shows this forecast reflecting the uncertainty in Australian exports, and ultimately the Australian real GDP.
These volatile forecasts for 2020 reflect the ongoing uncertainty in commodity assets as the economic fallout from the US-China trade dispute continues to disrupt commodity asset prices. This risk was expressed by Lowe in his The Year Ahead speech where Australian commodity exporters would face higher volatility with this trade dispute. From this forecast, and the statistically significant positive relationship between real GDP and exports, a counterfactual inference that the real GDP growth would indeed slow down during 2020 – should COVID-19 never exist – is plausible.
A counterfactual Australian economy without COVID-19 could experience a recession stemming from continuous uncertainty in its export markets; it will not, however, be as deep as the COVID-19-induced recession Australia experienced during 2020. Exports showed signs of caution with volatility being a key theme.
With exports, its high correlation with real GDP indicates a high level of pro-cyclicality - thus, pre-COVID-19 forecasts developed by the federal government showed signs of volatility with quarters throughout 2020 showing both negative and positive growth in commodity exports. This volatility is explained by the global trade uncertainties of Brexit, but mainly the US-China trade dispute given that China is a large importer of Australian commodities.
By Naosheyrvaan Nasir - Bachelor of Arts and a Bachelor of Advanced Studies