Australia may become an economic casualty as trading partners the US and China vow to become more self-sufficient in the wake of COVID-19.

George Toubia, Chief Investment Officer at Westpac Private Bank, said in a recent call that the pandemic has highlighted discomfort around frayed supply chains and reliance on overseas manufacturing, and would lead to a permanent change in the forward shape of the world’s two biggest economies.

“Both of those nations will make their domestic economies much more consumption, technology and innovation-led, and both of them want to be less sensitive to global trade flows and global supply chains over time.”

Toubia expects the Chinese Politburo’s focus on self-sufficiency to elevate through domestic services and consumption. He observes that a few weeks ago, it was inconceivable that after facing a supply shock in February, China’s economy is now facing a demand shock as the economies of its main customers slow. This has important implications to countries that rely on China as a destination for demand or intermediary packaging of products for global customers.

He noted that over the last six weeks, Australian mining has become the only sector underpinning our exports and hence become “mission critical” in supporting national revenues and the stimulus response needed to support the nation. While the other main export driver, high-value services such as education, were knocked out.

“For Australia, this means our dependency on China for services exports which includes education needs to be re-assessed as we think about Australia’s long-term economic vitality.”

Permanent changes to behaviour

At a micro-economic level, the pandemic will also meaningfully alter consumer habits, business decisions and prospects for specific sectors and business models globally, which in totality could mean more deleveraging in the system and lower growth on aggregate.

For consumers, the heightened focus on financial security will result in having a higher degree of savings and an increasing capacity to service debt in the future. For smaller and cyclically sensitive businesses, Westpac expects an increased focus on having a more conservative liquidity profile.

“For Australia, this means the consumer deleveraging cycle that we have been expecting since early 2019 will last longer than our original thinking of 2-3 years.”

But amid the undercurrents of these changes, Toubia called out two winners: technology, which will see even faster adoption than before the crisis and greater investments in preventative healthcare. Specifically, he nominated the following as the themes to watch:

• Acceleration of cloud/digital adoption – Digital transformation trends will become a top strategic priority for companies as the global economy progresses beyond the epidemic. This will underlie a deeper and a more profound shift towards the cloud, added use of online and remotely activated business services and the associated need for more security and scalable telecom services.
• A faster shift to e-commerce - The short-term sudden economic shut down will accelerate the restructuring of the global retail sector, of which one major consequence will be a permanent, step-change acceleration of the shift towards e-commerce and e-services.
• Exponential deployment of 5G – Westpac’s conviction has increased in its thematic view that 5G will enable the fostering of a digital shared economy, transforming industries, and enhancing people’s quality of life through the deployment of advanced technologies. As a result, they expect selected service providers in this space to experience revenue growth into 2021.
• The permanent rise of telemedicine investments in healthcare – The linking of doctors and other healthcare specialists to patients via telecommunications will see significant take-up. The world will also see fast acceleration in the adoption of innovative technologies that drive significant change in the delivery of healthcare, from early detection, intelligent diagnostics (utilising the power of artificial intelligence) and, less invasive surgeries as well as personalised treatments.

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