Budget surplus plan ‘at risk’ from trade war and China slowdown

Forecasts for a return to federal budget surpluses will have to be ditched if the trade war puts the brakes on growth in China.

Treasurer Josh Frydenberg. Picture: AAP

Forecasts for a return to federal budget surpluses over coming years will have to be ditched if the trade war puts the brakes on growth in China, one of the country’s biggest banks has warned.

“If there is a sharp slowdown in China, the Australian government will need to forgo its forecast budget surplus in order to proactively support the economy,” said economist Hayden Dimes at the ANZ.

The global economic backdrop had deteriorated this year as US-China trade negotiations have faltered and a resolution seems less likely, Mr Dimes added.

Australia is particularly at risk from heightened global uncertainty and a slowdown in China from a prolonged trade war given its exposure to China through trade, he added.

There’s plenty at stake for Australia at a meeting in Japan next week between US President Donald Trump and Chinese President Xi Jinping to work through their differences.

If China slows and global sentiment deteriorates, Australia’s economy would feel the impact directly on GDP and then again from second round effects through deteriorating domestic business sentiment.

“No part of the domestic economy is growing strongly enough to maintain momentum for Australia in a world of deteriorating global conditions that includes China slowing,” Mr Dimes said.

The ANZ is fearful that the government will cut spending in an effort to protects its surpluses, saying “this could exacerbate the situation and lead to an even larger economic slowdown”.

ANZ’s trade warning comes a day after the Reserve Bank renewed a plea for Josh Frydenberg to join in efforts to lift the economy out of its worst funk in a decade by boosting budget spending.

In minutes of the RBA’s June 4 policy meeting, the central bank indicated further in interest rate cuts were coming, while adding that lowering interest rates was not the only tool that can be called upon to boost economic activity.

A big exporter of iron ore to China, Australia would immediately feel the pinch if infrastructure spending slowed in the world’s second biggest economy.

In April, the government forecast a budget surplus — the first in 12 years — of $7.1 billion, or 0.4 per cent of GDP, by June next year and $11bn in mid-2021 on the back of stronger coal and iron-ore export revenues. The surplus is despite $100bn in spending on new fast rail, road and freight networks.

The RBA is already dipping into its remaining conventional monetary policy ammunition, leaving it with less room to move should economic growth be crunched. The RBA lowered its official cash rate to 1.25 per cent from 1.50 per cent on June 4, it’s first cut in nearly three years.

RBA Governor Philip Lowe has pointed to the importance of both monetary and fiscal policy working together, while market economists are assessing the growing probability that the RBA will call upon unorthodox policy measures next year.

Dr Lowe has also called for greater attention by government on structural reforms to lift flagging productivity growth. The Treasurer has so far ignored the pleas, pointing instead to already promised income tax cuts and infrastructure spend.

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