Yahoo Finance China and the Aussie dollar: Australia's next big economic hurdles
China’s economic performance matters to Australia more than most other countries.
Just when the Australian economy is getting breathing space, with the Reserve Bank (RBA) holding interest rates steady as inflation falls and economic growth slows, problems in the Chinese economy are building and threatening to derail the path to lower inflation without a recession.
The Chinese economy is slowing at a troubling pace and is one of the main factors driving the recent ructions in global financial markets.
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Such is the weakness in China that it is now experiencing deflation, with both consumer and producer prices falling over the past year, something in stark contrast to the situation in much of the rest of the world.
The Chinese authorities have eased a range of economic policies, as they work to support growth and try to reverse the deflationary trends that threaten to lock in an extended period of weakness in the world’s second-largest economy. They have a track record, over many decades, of getting these pro-growth policies broadly right, and the rest of the world in general - and Australia in particular - is hoping they get it right again.
China’s economic performance matters to Australia more than most other countries because it takes between a quarter and a third of our exports and, for the bulk of the past three decades, has paid an elevated price for those goods.
It is a reason Australia is now running an international trade surplus of 6 per cent of GDP, a far cry from the general experience 20-30 years ago where the trade deficit hovered around 3 per cent of GDP.
China has helped Australia get through the past 30 years with just one recession – the COVID-driven one.
The massive export growth to China has boosted Australia’s national income, helped in the current cycle to allow exceedingly profitable mining companies to make mega profits and pay considerable tax, which in turn has helped to deliver a budget surplus in the financial year just past.
If the Chinese economy enters an extended period of weakness, the reverse of these favourable economic effects will hit Australia.
The latest bout of China concerns has shown up most clearly in the fall in the Australian dollar, which at one stage dipped below US$0.6400 and over 1.70 to the euro.
While some chicken-littles are concerned about the dollar’s fall, as a freely floating currency, the Australian dollar has, for 40 years now, risen and fallen in line with material changes in economic fundamentals.
Weak growth, low and falling commodity prices, slower major-trading-partner growth and rising perceptions of risk are usually associated with a lower value for the Australian dollar; the opposite fundamentals see the Australian dollar rise.
This is the whole design of a floating exchange rate. It acts as a shock absorber to major events and, in the process, helps to even out the extremes in inflation and economic growth.
Rather than being concerned about the recent fall, which has been orderly and based on clear and meaningful changes in its fundamental drivers, it is a necessary market response to the new news.
A lower dollar will also provide support for the economy.
Exporters will benefit by receiving more Australian dollars for a given level of receipts in US dollars, euros and other currencies, and it will make trade-exposed business more internationally competitive.
Local firms that compete with importers will benefit. With the lower Australian dollar, domestic tourism, for example, will benefit. Australians will be more inclined to holiday within Australia rather than going overseas and international travellers will see Australia as a more affordable destination simply because of the exchange rate.
China and the level of the Australian dollar look to be the next big issues for the economy.
With unemployment rising, growth slowing and falling inflation are the central economic themes for the next six to 12 months.
This economic framework has been baked in for some time with the aggressive rate hikes from the RBA.
If the Chinese economic weakness feeds into lower commodity prices and a fall in Australian export volumes, the outlook for the economy will go from problematic to something worse.
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