While any new tariffs imposed by the US would primarily affect China, AMP chief economist Shane Oliver has warned that they could also have indirect consequences for Australia due to ongoing trade ties and reliance on Chinese demand for key exports.
Chinese economic growth has remained relatively stable despite a range of structural challenges; however, further tariffs could place additional strain on already subdued business conditions, soft demand growth and falling producer prices.
Oliver noted that a renewed trade war between the US and China, if the current truce expires and trade talks fail, remains the key risk that could trigger more aggressive policy stimulus in China.
China’s economic growth has slowed in recent years, stabilising around 5 per cent after decades of rapid expansion.
Although this is down from some 10 per cent annual growth seen during the 2000s, Oliver described the current pace as “still solid by global standards”.
“But such a slowdown is inevitable as a country develops and the easy gains of switching from simple farming to industry are seen,” Oliver added.
While tariff-induced risks primarily apply to China, this still holds implications for Australia, largely due to the long-standing trade ties and continued reliance on Chinese demand for key exports, particularly iron ore.
However, Australia’s direct sensitivity to Chinese economic swings has declined over recent years.
“The Australian economy has been relatively resilient compared to its past correlation to China reflecting a combination of solid bulk commodity prices, strong population growth, and a muted mining investment cycle,” Oliver said.
“So, another swing up or down in the Chinese economy may not have a big impact on the Australian economy.”
Looking forward, Oliver expects that Chinese authorities will continue to manage growth near the 5 per cent level through targeted policy measures.
“Our assessment though is that China will do just enough to keep its economy growing at an OK rate, which in turn will support demand for Australian commodity exports,” he said. “[This] will likely keep the iron ore price tracking above the federal government’s budget expectations.”
Oliver warned, however, that the boost to the budget through stronger mining profits won’t be as potent as it has been over the last two financial years.
While a reignited trade war between the global powerhouses would increase the risk of short-term disruption, “a cyclical collapse in growth looks unlikely” according to the chief economist.
Overall, Oliver believes the long-term outlook for China is more positive than some suggest, but several structural challenges are likely to persist.
These include high household savings and weak consumer spending, rising state intervention in the economy, fiscal imbalances between central and local governments, and a rapidly ageing population.
Based on these challenges, estimates for China’s potential real gross domestic product growth have fallen from around 10 per cent in the years from 2006 to 2010 down to around 5 per cent now. This is expected to fall lower to 3 per cent over the next decade.
However, Oliver noted there have also been positive developments on the structural front, including incentives to boost the birth rate, increasing support for tech entrepreneurs and measures to address industrial excess capacity.
“A longer-term trend towards slower growth in China will likely remain in place. But a cyclical collapse in growth looks unlikely,” Oliver said.
For Australia, this suggests that while economic uncertainty continues to cast a dark cloud, a sharp external shock appears unlikely.
Oliver said AMP expects that China will do just enough to keep its economy growing at an OK rate which in turn will support demand for Australian commodity exports.
“This will likely help keep the iron ore price tracking above the federal government’s budget assumptions. Although, the boost to the budget via stronger mining profits won’t be as strong as it has been over the last two financial years,” he said.
