Economy strong thanks to China, ‘heaps of stimulus’

China has propped up Australia’s national income, with a new report finding there is already “heaps of stimulus in the pipeline”.

Deloitte Access Economics Director Chris Richardson: “This is the first ever global slowdown in which the world has actually given Australia a pay rise instead of a pay cut,”. Picture: AAP

China has propped up Australia’s national income amid a global slowdown, with a new report finding there is already “heaps of stimulus in the pipeline” to grow wages and drive down unemployment.

The Deloitte Business Outlook, published today, was seized on by Josh Frydenberg as an endorsement of the government’s strategy, declaring the economy is “growing and the fundamentals are strong”.

The Treasurer also cautioned Australians not to “get their hopes up” for an early surplus being delivered in the 2018-19 financial year and argued that the government’s $158 billion tax cut package, along with the two consecutive interest rate reductions and a loosening of lending standards, would help drive growth.

In the Business Outlook, Access Economics partner Chris Richardson — the principal report author — has argued the slowdown in Australia is not as big as many think and that Beijing’s response to the US trade war and slowing economic growth has benefited the Australian economy by pushing up coal and iron ore prices.

“This is the first ever global slowdown in which the world has actually given Australia a pay rise instead of a pay cut,” he said. “The drought and the downturn in housing prices are hurting the Australian economy, but the global slowdown has — so far — been good news for Australia.”

China is Australia’s biggest trading partner, buying iron ore and coking coal for steelmaking. Australian iron ore was last traded on Friday at $US119.5 a tonne, but was recently pushing highs of close to $US130 a tonne. Since January, prices are up more than 60 per cent.

Premium coking coal last traded at $US186.98 a tonne and, while it has eased in recent months from above $US200 a tonne, it still remains up on last year’s prices.

Mr Richardson also weighed into the debate over RBA governor Philip Lowe’s justification for the back-to-back interest rate cuts, saying that a “slowdown isn’t the main reason why it is cutting rates”. “The main reason is that the RBA has changed its mind about how many extra jobs it has to create to get wage growth moving along,” he said.

“It used to think that needed unemployment to go to 5 per cent. Now it thinks unemployment has to go to 4.5 per cent. It could have reached that different conclusion a couple of years ago. It has happened to have reached it now.

“Everyone has seen the RBA banging out rate cut after rate cut and calling on the government to do stuff. They are interpreting that as the economy must be going to hell in handbasket, but it really isn’t.”

Mr Richardson said there was more stimulus coming into the Australian economy than was ­appreciated, with the government yesterday moving to put $804 a year back into part pensioners’ pockets by lowering the deeming rate for the pension. Labor slammed the reduction as “too little, too late”, and argued the government had been short-changing pensioners to prop-up the budget for years.

Mr Frydenberg, responding to the Deloitte report, said that when the government finalised the budget, it was mindful of trade tensions with China and the US and the impact of drought and flood.

“The combination of tax cuts, the interest rate cuts, the infrastructure spending, the regulatory changes that APRA have made are going to be good news for the Australian economy,” he said. “We should not lose sight of the fact that Australia is in its 28th year of consecutive economic growth, we have maintained our AAA credit rating, there are a record number of Australians in work and the Budget is coming back into back to surplus for the first time in a decade.”

The release of the report coincided with a renewed political skirmish over wages growth, with Labor Treasury spokesman Jim Chalmers arguing the Deloitte Business Outlook showed the entrenched “underperformance of wages”.

“The RBA has been forced to pick up the slack where it can, because the government has vacated the field when it comes to economic growth,” Dr Chalmers said. “This third-term government needs to take responsibility for the floundering economy on its watch, which is defined by weak consumption, feeble growth and stagnant wages.”

Mr Frydenberg also lashed out yesterday at media criticism of Dr Lowe’s comments on Friday, in which the RBA governor said that he “100 per cent” agreed with the Treasurer’s assessment that the “economy is growing and the fundamentals are strong”.

Speaking on the ABC’s Insiders program, Mr Frydenberg said: “The bank is independent and governor Philip Lowe is a very respected figure. And Treasurers, prime ministers, have productive and constructive dialogue. The fact that we sat down for over two hours, exchanged notes on the economy and went through in detail the infrastructure pipeline, is a positive development, not to be looked at in any other way.”

Mr Richardson told The Australian it was possible to “keep going with the stimulus to help bring down unemployment and grow wages faster” but warned it meant losing out on “wriggle room if there is a crisis down the track”.

“We could only use this stimulus once,” he said.

The Business Outlook said that the stimulus was “arriving fast”. “The election result reduced policy uncertainty, there are big tax cuts hitting pockets in a few weeks, there’s interest rate cuts, plus reduced pressures on bank funding costs, a loosening of the noose on lending for housing by the regulators, plus a (modestly) lower Australian dollar,” it found.