Morrison government worried China’s Covid elimination push may hit growth prospects of world’s second biggest economy

The Morrison government is concerned that Beijing’s hard line approach to stamping out Covid-19 may hit the growth prospects of the world’s second largest economy.

The Morrison government is concerned that Beijing’s hard line approach to stamping out Covid-19 could hit the growth prospects of the world’s second largest economy. Picture: AFP

After years of relying on the Chinese economy to underpin Australia’s own growth, Treasury is now concerned that Beijing’s hard line approach to stamping out the Covid-19 pandemic could hit the growth prospects of the world’s second largest economy.

The concern – outlined in the budget – comes as Treasury becomes increasingly concerned that the Russian invasion of Ukraine could slice ¾ of a percentage point off global growth and increase global inflation by 1.5 percentage points.

“Chinese growth is expected to be hampered this year by challenges managing the pandemic, higher prices for energy imports and an already slowing property sector,” Treasury officials note in budget papers this year. “China is likely to experience more frequent and severe Covid-19 outbreaks this year than in 2021.”

It warns that a “continuation of its aggressive suppression approach to managing the virus (is) likely to lead to more frequent lockdowns and disruptions to industrial production and normal consumption patterns.”

However, officials write: “these headwinds will be partly offset by more supportive macroeconomic policy settings as central authorities have signalled willingness to act to support their ambitious growth target over other policy objectives in the near term.”

Concerns about the vulnerability of the Chinese economy on the downside are reflected in the Budget estimates being based on the ultra cautious expectations of a big fall in iron ore prices from current levels of around $US138 a tonne to ultra conservative $US55 a tonne by as early by the end of September.

The Treasury is expecting the Chinese economy to grow at 4.75 per cent in 2022, 5.25 per cent in 2023 and five per cent in 2024.

While this is lower than previous years, when China reported growth rates of well over six per cent- and rates near 10 per cent in headier days-, it is still one of the strongest growth rate of any other major economy or region.

Only the much smaller Indian economy is expected to grow at a strong rate – 8.25 per cent – this year. It compares with growth in Europe of some 3.5 per cent this year, US economic growth of 3.5 per cent, 2.5 per cent growth in Japan – the world’s third largest economy – this year.

The outlook for the Australian economy is underwritten by expectations of a two per cent growth in exports in this financial year, with strong rural exports driving export growth in the current financial year.

It expects exports to step up to five per cent in 2022-23 and six per cent in 2023-24.

Treasury is also expecting that China’s continued closed economy will provide a continued drag on overseas tourism to Australia and foreign students in the near term. It warns that outbound tourism will recover to pre-pandemic levels faster than inbound tourism as a result of the delayed reopening of the Chinese economy.

“International tourism will drag on the growth of net exports in the near term,” it warns.

Treasury also warns that China’s closed borders will be a factor in the continued reduction in income from education exports in the immediate term.

“Even though student arrivals have picked up significantly, education exports are still expected to fall in 2021-22, as the number of students competing their studies exceeds new student commencements,” it says.

This will drive a 5.5 per cent fall in services exports in 2021-22.

But it expects the situation to start turning around next financial year. “By 2022-23 a continued recovery in the number of foreign tourist and student arrivals is expected to see a strong turnaround, with service exports expected to increase by 12 per cent,” the budget papers read.

“This recovery is expected to strengthen in 2023-24 with services exports expected to grow by 29 per cent.”