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Australia stuck in ‘perfect storm’ between US and China

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A computerised graphic of a man standing on a ledge with the US flag on one side and another man standing on a ledge with the China flag on the other side as the gap between them grows larger.
As tensions between the US and China grows, their economies are also facing hardships. So, where does that leave us? (Source: Getty)

A recent Deutsche Bank report suggested the United States could sink into a recession late next year, but what would that mean for Australia?

Well, Stephen Miller, adviser at GSFM, told Yahoo Finance the chances of Australia following suit depended on another country entirely.

“There is a non-trivial risk the US could have a recession in the next 12-18 months, and the problem for us is that it could happen when the other big global locomotive, China, is dealing with its own challenges,” Miller said.

“If the US does slip into recession, that could create the perfect storm for Australia because the two big economies could be in the same boat. Even if China isn’t in a technical recession, it will be experiencing a potentially sharp growth slowdown because of the lockdowns.”

There is a saying in finance that, “If the US sneezes the whole world catches a cold”, but Miller said that may not be the case.

“That may not necessarily be true for Australia,” he said.

“But, if the US sneezes and China sneezes, we will catch pneumonia.”

But, not all think things could be as dire as that for Australia. AMP Capital chief economist Shane Oliver told Yahoo Finance that, with any luck, China’s slowdown and a possible US recession would miss each other.

“If the US is going to go into a recession, it won’t be until the end of next year, but the lockdowns in China are happening now,” Oliver said.

“It is quite probable China will have a tough six months but I think it will pull through because at some point they will have to make the trade-off between their COVID-zero strategy and their economy.”

A new Cold War

Australia, of course, is in a complicated situation when it comes to our major trading partners - China being the biggest by far.

Much of our economy relies on China buying our commodities like coal and iron ore.

But, Miller said it was not quite as simple as just finding new countries to sell our natural resources to.

“Do we need to be looking into other countries where we could sell our goods? Yes. But I'm not sure how one goes about achieving that,” Miller said.

“Our natural resources are both a curse and a blessing.

“It's our natural resources that account for the strong economic relationship that we have with China, and it's very difficult to get us off that certainly in the short term.”

Oliver likened the tensions between the US and China to the Cold War - except this time we’re smack bang in the middle.

“China is our biggest trading partner, but the US is still the world's biggest economy and that affects demand for our exports,” he said.

“We are vulnerable to two countries that have the greatest impact on our economy - China directly and the US indirectly - that are on different sides of a new Cold War.”

What will happen to Australia if the US goes into recession?

Oliver said it was unlikely Australia would follow suit.

“I think it would certainly increase the risk for Australia but it wouldn't be assured that we would go into recession as it hasn't been the case for the last 30 years or so,” Oliver said.

“I think one big difference between Australia and the US is that the US inflation rate is roughly double ours at present and, even though our inflation rate is rising, it hasn’t reached the extremes that the US has.”

Miller predicted that while a US recession alone would not plunge us into one, there would be consequences.

“First of all, interest rates probably won't rise by as much as perhaps some had feared,” he said.

“The second thing is I think what you'll see is … a sharply lower Aussie dollar.

“They're the two most immediate consequences if the US falls into recession.”

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