RBA On Hold as Nightmare Scenario of China Slowdown Emerges

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Australia is set to keep interest rates unchanged Tuesday as policy makers keep searching for signs that prior stimulus is encouraging households to spend. Hovering over the meeting is the specter of a viral-induced slowdown in China.

Governor Philip Lowe will keep the cash rate at 0.75% at the Reserve Bank’s first meeting of the year, according to 22 of 25 economists, with markets pricing similarly. The turnaround -- the majority began the year forecasting a February easing -- was driven by a fall in unemployment in the final two months of 2019.

“The economic data has generally come in on the stronger side over recent months,” said Kristina Clifton, a senior economist at Commonwealth Bank of Australia. “But the virus has the potential to impact on economic growth as consumers spend less, business and consumer confidence drops and tourists and people traveling for business delay their plans.”

Most economists trying to discern the impact of novel coronavirus have harked back to the SARS epidemic 17 years ago. Yet, that was a different world. Australia’s links to China’s economy have increased exponentially since. The numbers tell the story:

China’s share of Australian exports was 33% in 2018-19 vs 7% in 2002-03Tourists from China jumped to 15% of total arrivals from 4% over the same period; and now account for more than a quarter of total visitor spendingAlmost a quarter of new foreign students are from ChinaChina bought 82% of Australian iron ore shipments last year, compared with 32% in 2003

China’s benchmark iron ore contract fell by its daily limit of 8% and Singapore’s contract has collapsed 11%, driven by a combination of concerns that the virus could strike near-term demand in China and expectations that global seaborne supplies are poised to expand.

A complete shutdown of Chinese tourism and student travel for a year would cut Australian GDP by almost 1 percentage point, “with significant additional multiplier effects,” according to Westpac Banking Corp.

The Australian tourism industry is already dealing with a demand shock following the wild fires that drove cancellations from abroad amid images of major cities choking on smoke, Australians fleeing their homes and fallen native animals.

Lowe cut interest rates three times between June and October to shore up consumer spending amid weak wages growth and elevated debt. The economic data in the past month has exceeded expectations.

What Bloomberg’s Economists Say

“Economic data in the rear view mirror supported the RBA’s view that the economy had reached a gentle turning point. But that now needs to be reassessed. The twin shocks of ongoing bushfires and the unfolding coronavirus outbreak are still playing out. There’s little hard data for the RBA to draw on to form a view on how badly the turning in the economy has been derailed, and how much additional stimulus may be required.”

James McIntyre, economist

Money markets have also begun to shift, with a March easing coming into view, whereas last week the broad expectation was that there was little prospect of the RBA easing before April. Cash-rate futures on Monday were pricing in a 60% chance of a cut next month, up from less than 40% last Wednesday following stronger-than-expected inflation data.

Lowe will be questioned on the disasters when he addresses the National Press Club Wednesday in a speech titled “The Year Ahead.”

On Friday he, Deputy Governor Guy Debelle and other senior officials will appear in Canberra for the RBA’s semi-annual parliamentary testimony. Concurrently, the RBA releases its Statement on Monetary Policy that includes updated forecasts for economic growth, inflation and unemployment. It’s expected that near-term GDP growth projections will be lowered.

One area where the RBA’s easing has impacted quickly is housing: Sydney and Melbourne are leading the rebound, with data Monday showing prices climbed 1.1% and 1.2% respectively in January.

The labor market has also stood strong, with unemployment falling to 5.1% in December from 5.3% in October. Data Monday showed job advertisements jumped 3.8% in January.

(Updates with comment from Bloomberg economist in 10th paragraph, money markets pricing in chance of March easing in 11th.)

--With assistance from Tomoko Sato.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Alexandra Veroude, Nasreen Seria

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