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MNI: China Woes To Have Limited Impact On Australia - Ex-RBA
China’s economic slowdown could reduce demand for Australia’s commodity exports and further weaken the Australian dollar, adding inflationary pressure, but the overall impact should be limited or even positive depending on the strategy Chinese authorities implement to bolster the economy, former Reserve Bank of Australia economists told MNI.
While Australia is the most exposed developed country to a China slowdown, the impact is likely to be cushioned if other major world economies remain relatively strong, according to Bob Gregory, emeritus professor at the ANU’s Research School of Social Sciences, who served on the RBA board between 1985-1995.
“Spot prices for our commodities may fall, but the terms of trade and average commodity prices, although slipping, will remain roughly okay for a while – the impact on Australia will not be as bad as many are predicting” Gregory said.
Australia’s terms of trade peaked in the June 2022 quarter at a record high, driven by strong commodities prices, before retreating over Q3. However, the Australian Bureau of Statistics Terms of Trade Index shows the metric has remained strong in 2023 (see chart).
Gregory said in past cycles, mining wealth had benefited either offshore investors or the general Australian public through higher wages, mining share prices and lower import prices generated by a strong Australian dollar. The impact on the economy was different this time – mining companies were paying considerable taxes as past tax concessions had ended, benefiting the government, while Australian consumers have missed out on lower import prices because of the weak AUD, Gregory argued.
He said a China slowdown will likely weaken AUD further and add to inflation, “but Australia has already adjusted to this somewhat as our import prices, after a decade or two of stability, have been increasing considerably in response to the exchange rate changes over the last two years.” The price of Australia’s resource exports – apart from coal and gas – had not significantly fed into the rise of domestic inflation, Gregory added.
PATH-DEPENDENT
Martin Eftimoski, head of research and acquisitions at property development and construction company Eternal Homes Projects and a former economist and China specialist at the RBA, argued a continuing China slowdown was likely, but a broad GFC-style collapse in the world’s second-largest economy remained highly unlikely.
He said the impact on Australia will hinge on the strategy Chinese authorities apply to deal with their slowing economy. They could embark on a range of infrastructure and real-estate construction, attempt to stimulate a consumption-led recovery, or simply do nothing, he said.
“The first option would be positive for Australia, while the second would be ok if not neutral,” Eftimoski argued. He doubted, however, whether China had the ability or appetite to conduct further real-estate or major infrastructure construction and questioned whether China could easily boost consumption. “The third would be the most negative of the three scenarios as it would result in a lot less demand for Australian primary goods,” he added.
Iron ore prices have softened this year, with the Platts IODEX 62% Fe iron ore price falling 11.1% in August to USD103.75 per dry metric ton from its three-month high posted on July 25.
Despite the falls, Eftimoski noted prices would stay above production costs. However, the long-term boom in the Australian resources sector was likely ending as new mining infrastructure investment dwindled – a fact the Australian economy must accept, he added.
“The main vectors of our relationship with China are iron ore, coal, natural gas and education,” he said. While Chinese demand for LNG would remain strong, China’s appetite for the other key exports would soften, he said.
But although Australia’s commodity-linked currency will suffer, Eftimoski argued it would not add much inflationary pressure. Historical inflation was largely imported, but this was ending as energy prices fall and U.S. inflation stablised, he added.
“Moving forward, exchange-rate depreciation matters to inflation only to the extent that there's actually inflationary drivers in international goods that we're importing,” he added. “Yes, our currency may depreciate further, but the goods we are importing are depreciating in price. Most inflation these days has moved to services inflation rather than goods inflation.”
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.