Apr 20, 2015

Sharper Chinese slowdown provokes local recession fears | The Australian

Weak wages growth and poor company profits are undermining the government’s budget plans, with a key economic forecaster warning that the downturn in China could yet push Australia into recession.
Deloitte Access Economics’ latest review of the economy says the fall in the exchange rate and lower interest rates are so far offsetting much of the damage caused by tumbling commodity prices and the winding down of construction work in the resources sector. “Australia is actually navigating the tricky shoals of transition away for the construction phase of the resources boom as well as could be expected,” the report, compiled by partner Chris Richardson, says.
China, however, is managing an even more difficult transition that could threaten Australia’s outlook. “It is certainly possible to see a scenario in which China’s slowdown becomes a sharper shake-out than we’ve allowed,” Mr Richardson says.
“We’re talking a recession scenario. If China sneezes, Australia will catch pneumonia.”
Although the Reserve Bank would cut rates in such a scenario, it has little further room to move, the report notes. The government would also be likely to deploy a stimulus package, but the political challenge of deficits would limit its size and effectiveness.
Deloitte Access says the narrowing of the budget deficit projected at the mid-year update in December, which envisaged the deficit falling from $40 billion this year to $12bn by 2017-18, “looks increasingly hard to achieve”.
All the key indicators of China’s economic performance are at or below the low points touched during the global financial crisis. This includes industrial production and investment flows into infrastructure, both vital for Australia’s commodity exports.
Even if China is able to stabilise its growth, as Deloitte Access predicts, that may not be enough to stop commodity prices falling further. If commodity prices ­returned to the long-term average levels achieved before the ­resources boom took off in 2002-03, the result would be the loss of a ­further 6 per cent of Australia’s nat­ional income from ­reduced export earnings.
Although economic growth is being helped by the fall in the ­exchange rate and the RBA interest rate cuts, the weakness in commodity prices is having a ­direct ­effect on company profits and on tax revenue.
Company profits are only slightly higher now than in 2006-07 before the GFC, and 8 per cent lower now than in 2011, which marked the peak in commodity prices. Budget revenue is also threatened by poor wages growth, which is expected to remain subdued, with increases of less than 3 per cent until
2016-17.
While low wage growth is helping Australian business recover some of the competitiveness lost during the resources boom, it is also slowing the growth of national income and budget tax revenue.
Efforts by the government to offset the weaker revenue with spending cuts have proven too hard to pass through the Senate, while state governments in Queensland and Victoria have lost office after attempting budget savings.
“Politics is cruelling efforts at state and federal budget repair, while the economy is hurting the fiscal outlook further,” the report says. “That combination says the repair task has grown, but the appetite to tackle it has faltered.

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