CHINA’s announcement today of 7.4% GDP growth for 2014 is the fifth consecutive year of slowing growth and the slowest for Australia’s most important trading partner since before the Deng Xiaoping-era reforms a quarter of a century ago began to get a head of steam and radically transform the communist Middle Kingdom into a global trading powerhouse.
Other than the Chinese, China’s growth has benefitted Australians the most, accounting for more than $100 billion in exports last year. It will remain a huge driver for economic prosperity, but the salad days are over as China seeks to rein in credit and slow economic growth to a more sustainable level. Hitting its targets is proving a bit like landing an A380 on a cricket pitch.
China’s GDP grew around 9-10% over the span of the Rudd-Gillard-Rudd governments. And Wayne Swan’s last budget imprudently assumed China’s GDP growth would remain as high as 8% in 2013 and 7.75% in 2014.
Credit Suisse forecasts China GDP growth of only 6.8% for 2015, Citi predicts 6.9% — or half of what it was when Labor was elected and enjoyed the best terms of trade in modern Australian history. Treasurer Joe Hockey even more pessimistically assumed a 6.5% growth in 2015 in his December Mid-Year Economic and Fiscal Outlook.
Resource prices have weakened substantially and Australia now faces a much more challenging economic environment.
This “soft downside” scenario was forecast by S&P three years ago: “…there is a deep weakening in prices for Australia’s resources exports, accompanied by weak volumes of exports. Business confidence and spending weakens below trend, and there is a deferral of capital expenditure in areas relating to economic infrastructure. Consumer sentiment weakens in line with softening employment conditions, which see the unemployment rate rising to 6.5%”.
A harder downside scenario, where China GDP growth dips another 2 per cent, would pose a serious recession risk to Australia.
Managing either scenario will be far more challenging for Australia than the GFC, which, thanks to China’s and the best terms of trade Australia has enjoyed in its modern economic history, previous economic reforms by Hawke-Keating and Howard-Costello, and the sound fiscal position left by the previous Coalition government, did not translate into an economic crisis for Australia (and was never a financial services crisis here, either).
Except now, with a still sluggish global economy, the budget surplus bequeathed by the Howard government (after paying the previous Labor debt) was turned by Labor into a $667 billion debt bomb.
The Australia-China Free Trade agreement signed by the Abbott government will help mitigate the impact of China’s slowing economy. A similar initiative with India has potential for the future as well, but India’s trade with Australia is currently incomparably small to that of China’s. The US economy is growing better but still below Treasury forecasts and cannot fill the void left by a slowing China. Europe’s economy remains moribund.
To recap: although Australia has the benefit of past economic reform going for it, it must now face global economic weakness with a poor fiscal position, thanks to Labor, and a much weaker Chinese economy.
Yet after being swept from office in a landslide, Bill Shorten has the political effrontery to stand in the way of a measly $28 billion in proposed budget savings and other measures to repair the damage done to the budget under Labor and protect the Australian economy.
Given the foregoing, one could easily be forgiven for believing Shorten was intentionally shirking his responsibilities to Australian families in the cynical belief he will benefit politically if things go really pear-shaped.
That political posture is wearing increasingly thin, particularly when Shorten has no more to offer than “go for growth” — three words and an empty slogan.
Alan R.M. Jones was an adviser in the Howard Government