Wandering China

An East/West pulse of China's fourth rise from down under.

Is the dragon running out of puff? [The Age]


Australia: Getting thicker into the intricacies of economic interdependence. Australia’s resource boom is seeing a structural shift where its mining sector is dominating its economy at the expense of others.

‘The logic goes that if Chinese exports are crunched so will be Chinese demand for the Australian resources needed to make these exports. This resource demand is driving the fast part of Australia’s two-speed economy – the other part being pretty much in neutral.’

– – –

Is the dragon running out of puff?
by Richard Webb
Source – The Age, published October 16, 2011

A cash-strapped China would be bad economic news for the rest of the world

NEWS that the economic turmoil in Europe is severely affecting Chinese exports has set alarm bells ringing in Australia.

The logic goes that if Chinese exports are crunched so will be Chinese demand for the Australian resources needed to make these exports. This resource demand is driving the fast part of Australia’s two-speed economy – the other part being pretty much in neutral.

On that basis then, if Europe collapses, or the US runs off the rails, Australia could quickly return to a one-speed economy – that one speed being not very fast at all.

Global base metals and oil prices took a hit after news of the Chinese trade figures and reduced trade surplus, but have since regrouped – both copper and oil rose 3.1 per cent on Friday night. The price of our main Chinese exports, iron ore and coal, held steady, so no immediate worries then. Even so, the extent of the Chinese export and import slowdown last month was a surprise to most economists and a clear indication the Chinese economy, despite being the world’s second largest, is not immune to what is going on in the US and Europe.

Deutsche Bank senior economist Phil O’Donaghoe says it used to be said the Australian business cycle was a function of the US business cycle. ”Now it’s changed – the US cycle is filtered through the Chinese cycle and then it comes to us,” he says.

Mr O’Donaghoe says there are two things going on in the Australian economy – a commodity boom and structural shift whereby the mining sector is becoming a bigger part of the economy at the expense of other sectors.

”So while this commodity boom will eventually come to an end – and it’s already gone on longer than it usually does – it’s going to result in a weaker economy, not a deep and desperate recession,” he says.

Brian Redican, senior economist at Macquarie Bank, says a problem could occur in China if this export slowdown continues and hits at the same time as slowing credit growth. ”Everyone will then be looking at the impact on commodity prices,” he says.

According to AMP Capital Investors chief economist Shane Oliver, the main long-term problem is that while Europe may eventually shore up its financial system and the US avoid recession, both must still pay down huge sovereign debt. They are dealing with this by cutting spending, which puts a damper on economic growth.

Bear in mind that a contracting economy will not only find it harder to service debt but will see its debt-to-GDP ratio rise because of GDP contraction. It’s a vicious circle in many respects.

”Every so often Europe plugs the dyke and it gives them a bit of peace for a few months, but then the problem returns,” Dr Oliver says. ”It could take several years to settle down the debt levels in Europe and maybe another five years for it to start to look a bit healthier – and we have got to expect regular flare-ups along the way.”

So economic growth out of the euro zone is going to be weak. Britain is also looking at years of austerity and the US has a big task ahead to balance its massive budget and trade deficits while lowering sovereign debt – and with unemployment already at 9.1 per cent.

”China has reduced the export share of its GDP from 35 per cent to around 28 per cent so it is less dependent on exports than it was, but the reality is it will still be affected. That means the outlook remains fairly constrained in Australia too,” says Dr Oliver.

”This year will be slow anyway because of the floods, but I expect we will be looking at underlying growth tied around 2.5 per cent to 3 per cent … That’s not enough to stop unemployment rising and a scenario pointing to lower inflation. It’s still going to be a pretty tough environment.”

That also means lower interest rates.

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Filed under: Australia, Chinese Model, Domestic Growth, Economics, Influence, International Relations, Politics, Public Diplomacy, Resources, Soft Power, Strategy, The Age

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