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Did China rescue Australia from the 2020 recession?

·4-min read
China pulled Australia out the 2020 recession. Source: REUTERS
China pulled Australia out the 2020 recession. Source: REUTERS

While fiscal stimulus, relatively easy monetary policy and the rapid scaling back of lockdowns and internal border closures have helped Australia’s economy get through, and even now recover from the 2020 recession, our extensive trade and other interlinkages with China have also been vital.

China’s economy was hit hard early in 2020 when the coronavirus swept through the country and a series of strict lock downs were imposed.

In the March quarter 2020, GDP in China fell a record 6.8 per cent (annualised), which was the weakest on record.

The authorities in China did the conventional thing and eased both fiscal and monetary policy as it worked to support the economy and deliver a resumption of the quite remarkable story of growth evident since the early 1990s.

The China recession … and bounce back

By March 2020, with the virus largely defeated and the easier policy kicking in GDP rebounded 3.2 per cent in the June quarter.

It rose a further 4.9 per cent in the September quarter and returned to a ‘business as usual’ 6.5 per cent in the December quarter 2020.

The early indictors for the March quarter 2021 show further unrelenting strength with GDP likely to have risen a further 6.5 per cent.

Australia benefits from China’s rebound

Well over one-third of Australia’s exports go to China and that proportion is growing.

Being so closely linked to one of the fastest growing countries in the world has given the Australian economy a massive boost for many years, but none more-so than now.

Australia is one of the major beneficiaries of this rebound in China and for that we should be grateful.

Perhaps the most obvious link to China, particularly in the COVID-19 era where closed borders has all but eliminated Chinese tourism and university students, iron ore exports have been manna from heaven.

Not only are the volumes of iron ore exports at or near record tonnages, but the price has hit record highs around US$175 (A$226) per tonne.

The cost of production for the large iron ore producers is around US$25 to $35 (at most) meaning the profits are huge.

These profits are feeding into a surge in share prices, company tax payments and could feed into additional capital expenditure as firms ramp up their capacity.

China has even reduced Australia’s Budget deficit

The China-bonus is showing up in the Federal budget numbers.

In October 2020, Treasurer Frydenberg was forecasting budget deficits of $214 billion in 2020-21 and $112 billion in 2021-22.

By the Mid-Year Economic and Fiscal Outlook (MYEFO), which was delivered in December, the estimates of these deficits had been scaled back to $198 billion and $108 billion, respectively which is a windfall of around $20 billion for those two years.

According to the most recent budget numbers for January, released by the Finance Minister last week, the budget deficit in 2020-21 to date is around $14 billion below the MYEFO estimate, a trend which points to the 2020-21 deficit around $175 billion.

If the deficit is around this level, it will mean the actual budget deficit will be around $40 billion below the initial budget forecast, which a significant part of this narrowing due to the China effect.

Importantly, the current iron ore price is around triple the Treasury forecast in the budget and MYEFO.

Of course, there have been some tensions between the Morrison and Xi governments, which have seen China impose a series of trade restrictions on selected items including wine, barley and seafood.

But while the businesses hit by these tariffs have suffered a loss of income and demand for their produce, in the scheme of aggregate trade linkages with China the impact has been relatively small.

With the Chinese economy still growing strongly, Australia can look forward to buoyant export volumes and solid prices for those exports.

And the benefits in terms of growth and jobs will be substantial.

There are several reasons why the Australian economy has performed relatively well since the 2020 recession.

One of those important reasons is the trade link with a China which has been vital in helping the economy recover.

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