Australia’s record run of economic growth may struggle to survive the next global downturn. The nation’s vulnerability to increasing external risks was the overriding concern of a panel discussion held Thursday between Heather Ridout, chair of Australia’s largest pension fund; Chris Bowen, who opinion polls signal will be the country’s next treasurer; and Sally Auld, JPMorgan Chase & Co.’s local head of fixed-income and currency strategy.
Their main conclusions: the U.S. will probably tip into recession in the next 12 to 18 months, any escalation of the U.S.-China trade dispute will buffet Australia’s open economy, and the nation won’t benefit from a repeat of the Chinese stimulus it enjoyed a decade ago.
“If the current trade skirmish turns into a full-on trade war, I am at the more pessimistic end of the scale of what that means,” Bowen told the Asia Society event held in Bloomberg’s Sydney offices. “I’m a little bit more worried about the animal spirits, both in Australia and elsewhere, and the confidence impacts. It could be worse than we might hope.”
Australia has avoided recession for more than 27 years and dodged the 2009 global downturn by deploying fiscal policy at home and then riding a wave of demand for its commodities as China injected massive fiscal stimulus. Today, Australia is potentially the meat in a trade-war sandwich as the most China-dependent economy in the developed world and one of the U.S.’s staunchest allies for the past 70 years.
“There has always been this sense that the risks around what’s happened with trade wars, and the way that was going to play out in Asia, was always to the downside,” Auld said. “Trade wars are largely unprecedented in the last couple of decades, at least on this scale.”
Ridout said that, during a recent trip to the U.S., she found the overwhelming consensus was that a recession there is almost inevitable. The combination of an economy already at full employment receiving a huge dose of stimulus from the Trump administration’s tax cuts suggests inflation is likely to accelerate, prompting the Federal Reserve to keep raising rates.
“There’s every possibility that the Fed will overshoot on this,” said Ridout, chair of AustralianSuper Pty and a former Reserve Bank of Australia board member. “There’s a lot of argument that the Fed could stop now because of the long lags in monetary policy.”
Friend or Foe
The struggle between the U.S. and China over trade, as well as disputes over the international bodies that regulate the global order, are a risk Down Under, the panelists said. China buys 35 percent of Australian exports, equivalent to about 8 percent of gross domestic product, and dominates iron ore shipments and education.
Bowen noted that Australia had only in the past decade found itself in a position where its top trading partner wasn’t an ally — for more than two centuries that role had been taken by the U.K., the U.S. and then Japan for a period.
“We’re a smaller economy, we’re highly leveraged to trade, so in a world where trade becomes more difficult, that in itself is not a good thing for us,” said JPMorgan’s Auld.
She warned it would be hard for Australia to “duck and weave” the next global slowdown. “The one thing that will be different this time around relative to 2008-09 is that China will not be doing a 7 percent of GDP fiscal stimulus,” Auld said. “We will have to battle that global slowdown on our own.”
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