IMF World Economic Outlook cites slowdown in China as risk to Australia

THESE hungry consumers have been buying our exports for decades but now it’s set to drastically slow down. It’s bad timing for Australia, so how worried should we be?

Joe Hockey at the New York Stock Exchange with australian flag . Source : Joe Hockey/Twitter

IT’S the news Australia didn’t want to hear.

Overnight, the International Monetary Fund’s World Economic Outlook was released, including a warning growth will slow in developing and emerging market economies over the year ahead.

Critically for Australia, China’s growth rate is expected to be 6.8 per cent this year and 6.3 per cent in 2016 — a sharp decline on the 7.4 per cent recorded in 2014 which is already the slowest pace in two decades.

While it was not a surprise, the slowdown comes during a crackdown on credit and investment growth by Chinese authorities and while Australia suffers from a slump in commodity prices.

“The downturn in the global commodity cycle is continuing to hit Australia’s economy, exacerbating the long-anticipated decline in resource-related investment,” the report states.

“Exporters of commodities (Australia, Indonesia, Malaysia, New Zealand) will see a drop in foreign earnings and a drag on growth, although currency depreciation will offer some cushion.”

No thanks, Australia. Oversupply and reduced demand for iron ore has seen commodity prices plummet. Pictured, Rio Tinto’s mine in WA.

Griffith University business school professor Fabrizio Carmignani said while China’s slowdown isn’t dramatic, demand for Australian exports will weaken in the short-term.

“The dynamics of international commodity prices do not help, in this regard, even though a realignment of the US dollar vis-a-vis the main international currencies can still support Australia’s international competitiveness,” he said in The Conversation

“What is clear, however, is that Australia is in a difficult cyclical phase, and hence a further tightening of fiscal policy is not desirable. The hope is that, this time, the government will take this into accounting in formulating the budget for the next fiscal year.”

Overall, the report found global growth will rise from 3.5 per cent in 2015 to 3.8 per cent in 2016 however the headline figure hides the mixed bag happening between countries.

IMF research director Olivier Blanchard said “complex forces” including the legacy of the financial crisis, low oil prices and dramatic movements in currency exchange rates are shaping the outlook.

“Large movements in relative prices, whether exchange rates or the price of oil, creates winners and losers,” he said.

Australia’s GDP is expected to grow by 2.8 per cent this year and 3.2 per cent next year in line with previous forecasts. The US economy will grow by 3.1 per cent while the eurozone is expected to record a 1.5 per cent improvement.

One Aussie economist says the slowdown in China means ‘business as usual’ for Australia. Pictured, pedestrians in Beijing. Picture: AFP PHOTO/WANG ZHAO.

SLOWER, BUT MORE SUSTAINABLE

While China’s economy is slowing, not everyone views it as a bad thing. IMF deputy research director Gian Maria Milesi-Ferretti described it as a “good slowdown” as the country moves from often-wasteful factory investment to more sustainable growth based on consumer spending.

Commsec’s chief economist Craig James said it’s “business as usual” for the Australian economy with growth heading back towards pre-GFC levels.

“People have to get used to the fact the Chinese economy will slow down. That’s just a fact of life. With any growing economy once you become among the ranks of largest in the world you’re not going to be able to sustain growth rates of eight, nine, ten per cent. It’s going to come down to something like the US, Europe, Japan, Australia,” he said.

“It doesn’t meant to say it’s negative. What we’ve got is a bigger economy multiplied by a slightly slower growth rate. In terms of contribution it’s still going to be very significant.”

Westpac’s senior economist Eliot Clarke said falling commodity prices have been a “significant shock” for Australia’s economy which the government will need to watch for in next month’s Federal Budget.

Workers also might want to wait before asking for that pay rise as the wage price index is at historic lows driven by the end of the mining boom.

“It’s a time when businesses are looking to be as efficient as possible. There is a need for productivity, you can argue that will still be rewarded … but aggregate wage growth is quite soft.”

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