Yahoo Finance Australia’s recovery is as much about Beijing as it is Canberra
Rather than picking fights with China, the Morrison government should be saying a huge ‘thank you’ to China for helping the Australian economy get out of the COVID-19 recession relatively quickly and with considerable upside momentum.
To be sure, the RBA action with near zero interest rates, billions of dollars of bond buying and concessional bank funding has played a part, as has the huge fiscal stimulus from the Commonwealth and State governments.
These have been vital in limiting the depths of the recession and starting to get the economy on the long road to recovery.
But the substantial demand from China for Australian export goods has been an unexpected boon for the local economy.
Here are a few facts:
Over one-third of the value of Australia’s annual exports of just under half a trillion dollars are purchased by China. Australia is intricately linked to the fortunes of the strength of the Chinese economy.
In the year to the March quarter 2021, China’s real GDP grew by a stunningly fabulous 18.3 per cent, the fast annual growth ever recorded. At the same time, the Chinese economy has seen a surge in retail spending, residential construction and industrial production. This economic boom has been great for China, and great for Australia.
The iron ore price has reached a record A$230 a tonne, based on hot demand from China. Iron ore is Australia’s largest export item. Other commodity prices of importance to Australian producers have also jumped, giving Australian producers, and the economy more generally, an export and income boost.
The good news is that the positive momentum in China is set to continue over the remainder of 2021 and probably into 2022.
Demand for Australian exports will, as a result, remain buoyant.
Trade tensions
The Chinese authorities have imposed a range of import restrictions on a number of Australian products, including wine, barley, coal, lobsters, timber and red meat.
This is in response to the Australian government ham-fisted diplomacy on exploring the origins of the COVID-19 virus and movements of Chinese naval ships in the South China Sea.
While the businesses producing those goods have been hit hard, the total effect on Australia’s overall export performance is, at this stage, relatively contained.
Indeed, Australia is continuing to run huge surpluses on its international trade balance of around $6-$9 billion per month. Strong export volumes relative to import growth plus near record high commodity prices are feeding this result.
Acknowledge the fact
It is important that the government, Treasury and the RBA acknowledge the good fortune from the strong Chinese economy.
It will help it frame its policy approach as COVID-19 issues fade in the years ahead and policies adjust to this new order.
Curiously, the RBA did not mention the strong Chinese economy in the Minutes of its April meeting, published earlier this week. This may have been a simple oversight. But if Chinese does in fact register on-going robust growth, the need for near zero interest rates will end sooner rather than later.
Treasury will need to analyse the effects of China’s economic boom as it frames the 11 May budget.
It is likely that the budget will show huge cuts in government spending, down around $100 billion in 2021-22. This is a dramatic cut in spending and is potentially an early step along the long road of repairing the budget which is also likely to show debt exceeding $1 trillion for the first time ever.
If this is more or less offset by solid growth in the domestic economy and a strong China, then fiscal consolidation may be appropriate. Time will tell.
But what about the risks?
There are risks – will China’s economy ever slow down?
The short answer to that is that it is unlikely, or if there is a negative shock to China, it will be short lived. This is because the government and other authorities in China will quickly and aggressively change policies to offset any downside. The response during the global financial crisis a little over a decade ago and indeed, last year with the COVID-19 pandemic, show just how pragmatic and effective policy makers in China are.
At the first sign of weakness, policy stimulus will be delivered.
For now, the Chinese economy is going from strength to strength. The iron ore and other commodity prices are booming. Australian commodity producers are swimming in money directly as a result of the China growth story.
It is set to continue a while longer and for that, we should say thanks to China.
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