China stands between Sydney and the Great Depression
Written by Writer on Tuesday, November 11th, 2008
COMMENTARY
China stands between Sydney and the Great Depression
Australia isn’t buying into this whole revisiting-the-1930sthing. The Asia-Pacific region’s fifth- biggest economy is even hiring.
Prime Minister Kevin Rudd gestures inside a car at a media announcement in Melbourne yesterday. Australia’s government is to inject an extra A$3.4 billion (US$2.3 billion) into the ailing car industry to offset tariff cuts and a global economic slowdown.
The unexpected addition of 34,300 jobs in October may not excite Americans losing employment at a feverish pace. Yet when your population is 21 million versus 309 million in the US and the world economy is melting down, such gains are impressive.
Australia’s secret? China.
While economists also point to income-tax cuts, lower interest rates and government handouts, there’s a sense from Sydney to Perth that China will shield the economy from forces causing global panic.
It’s a dangerous assumption as the worst financial crisis in decades spreads. The same goes for other Asia-Pacific nations.
Few countries have benefited more from China’s boom than Australia. Geography is part of it, though the real boon for the $822 billion economy is its abundance of raw materials, which China needs to thrive.
They include iron ore, copper, coal and other commodities, not to mention agriculture.
Craig James, a senior economist at Commonwealth Bank of Australia in Sydney, had a point when he headlined a Nov 6 report: “Job Surge Silences Doomsayers.”
Yet the 10%-plus growth that neighbours expect from China may edge closer to 5%. While it is the kind of expansion the US, Japan and Germany would envy, it is crisis territory for China.
“It’s clear there is evidence of some slowdown in the Chinese economy and that will affect us as well, and again that’s one of the international challenges that we face,” Kevin Rudd, Australia’s prime minister, told Radio 2UE in Sydney on Oct 31. In the next breath, Mr Rudd added: “I believe we are going to see further action from the Chinese on what we would describe as the country’s fiscal policy to add to growth in that economy.”
In other words, officials in Beijing are on top of things.
If Mr Rudd realises how vulnerable his economy could be to a deepening Chinese slowdown, he’s not saying.
Australia’s central bank did as much yesterday, signalling it is prepared to add to the most aggressive interest-rate cuts in 17 years as it cut its 2008 growth forecast to 1.5% from 2%.
China also announced a 4 trillion yuan ($586 billion) stimulus plan, equal to 20% of gross domestic product, to prop up growth in the world’s fourth-largest economy.
It’s a reminder that Australia isn’t without options. It still has a budget surplus, a rare thing among developed nations. Even if it did slash its forecast by three quarters last week to A$5.4 billion (US$3.8 billion), a surplus is a surplus.
Not needing to borrow much in this environment is a key advantage.
The nation’s 4.3% jobless rate compares favourably with the US and Europe. Reserve Bank of Australia Governor Glenn Stevens still has 525 basis points worth of short-term rates to cut. The US has just 100 basis points of ammunition; Japan has just 30.
Australia certainly isn’t a candidate for the Asian region’s Iceland. A dependence on foreign money to fund a current-account deficit is hurting the Australian dollar, which is down 24% against the US currency this year. Like Iceland, Australia was a favourite among investors borrowing cheaply in yen to bet on high-yielding currencies. The similarities end there.
Given the worsening global-growth picture, Australia will need all the policy tools it can find. Concern that the housing slowdown is deepening may be one reason. The central bank last week cut the benchmark interest rate by three-quarters of a percentage point - following a one percentage-point cut in October - as real-estate values slide.
Construction shrank in October for an eighth month. One index came in at 36.4, according to the Australian Industry Group and Housing Industry Association. A reading of less than 50 points shows construction contracted.
A measure of shipping costs for commodities known as the Baltic Dry Index also should give Mr Rudd reason for pause. It has fallen about 90% since May due to the global economic slump and slowing international trade amid tight credit markets. Such numbers dramatise China’s increasing fragility. When commodity-shipping costs are falling, you know that China is slowing more drastically than the official data suggest. It’s telling, for example, that Chinese Finance Minister Xie Xuren left an international economic conference in Peru before it even began. He arrived on Nov 5 and headed back shortly afterward to help resolve problems at home, an organiser of the event told Bloomberg News. It’s also a bad sign for executives who think growth in Southeast Asia will offset falling Chinese demand. As the US slides, it will bring Japan and China with it. Southeast Asia would be next. And then there’s India, also a growing export market for Australia’s resources.
When shares of solid companies such as Toyota Motor Corp plunge - Toyota last week projected the biggest annual earnings drop in at least 18 years - you know the economy is in trouble.
The same is true of Sheldon Adelson, the billionaire who controls Las Vegas Sands Corp and is seeking a bailout from Singapore. Wasn’t gambling supposed to be recession-proof? Look out, Macau.
Australia is better positioned than others in the Asia-Pacific region amid fears of another Great Depression. That doesn’t mean an economy that has been the envy of the world for years will avoid a worsening global storm.
William Pesek is a Bloomberg News columnist. The opinions expressed are his own.
Bangkok Post
Tuesday November 11, 2008
