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When the Chinese economy slows, Australia’s may tumble.

January 21st, 2010 · Greg Atkinson · 9 Comments

All things considered 2009 was not a bad year for the Australian economy and certainly a good year for the Australian stock market. Now with the worst of the global financial crisis apparently behind us all should be well in 2010 correct? Well maybe, China willing, but where others see blue skies ahead for the economy I see storm clouds.

I believe in economic and business cycles. This means I expect some times to be good, and some times to be no so good or even positively bad for economies and businesses.  As much as we try and avoid “booms” and “busts” the best we can do is to try and smooth them out a little.

Quite often however the actions of governments and central banks actually help create economic bubbles and thus make the situation worse when we get to the bust part of the cycle.

So in my mind it is only a matter of time before China swings from “miracle growth” to a period where their economy slows down.  The best the Chinese authorities can do is to try and manage the slowdown so that when arrives it isn’t severe, but one is coming that is for sure.

Many will scoff at what I am saying and roll out all sorts of impressive figures to support the consensus view that the Chinese economy is heading onwards and upwards for at least the next 10 years.  But we have heard all this before back in the 1990’s when the “Tiger Economies” were all the rage. 

At one stage they were also apparently on an unstoppable path to economic supremacy but eventually the economic cycle turned, and their heady days of rampart growth came to a sudden end.

I have mentioned the Tiger Economies a few times over the last year because I see China as basically being the  current “Tiger Economy”. So
at this point I suggest it is worthwhile to read this article “The Overfed Tiger Economies” from the New York Times in 1997. Because just as these economies were “overfed” in the 90’s so I believe the Chinese economy is now well and truly overfed.

The Australian economy has indeed benefited from the commodities boom over the last decade and it held up well during the global financial crisis mainly because of China. It may hurt our egos, but the fact is Chinese demand for stuff we dig up is the reason our economy avoided a recession.

But be warned, we will have a recession sooner or later (the last one was back in the early 1990’s) and when it does come around it could be a nasty one.

The most likely trigger for an economic downturn in Australia would be a slowdown in the Chinese economy. Although our exports to other nations like India may hold up relatively well, I believe the psychological impact of a Chinese economic slowdown would be devastating.

The Australian public and many business appear convinced that our economy is almost invincible and that in the decades ahead Australia will grow more prosperous, our homes will become bigger and our population will surge. (while curiously also believing we will reduce our CO2 emissions!)

This perception is fueled by the generally poor standard of business and financial reporting in Australia. The only way to get access to good economic or business analysis is to head offshore and visit sites like Bloomberg.com.

If you only rely on Australian news content to get a view of how the Australian economy is performing then it is like driving at night without headlights. You will find out there is a pole in front of your car when you hit it.

Let’s just imagine what would happen if the Chinese economic cycle turns and the Chinese economy slows or even contracts. What impact would that have on the Australian stock market and economy?

Well firstly without a doubt, stocks in Australia would fall in a broad sell off. Over the last few days we have already seen how measures taken by the Chinese authorities to cool down their economy has sent our market (and many of the worlds markets) lower.

The Baltic Dry Index is just above 3000, oil is below $80 USD a barrel and for my money it looks like the great Chinese spending spree is already being tweaked back somewhat.

But I don’t expect the stock market to do that badly in 2010 basically because it has already suffered a major correction and is at a recession like level already. An economic slowdown in China would largely impact the real economy in Australia.

We already import more than we export and thus as a nation we are spending more than we earn. Household debt remains high and we did not really do much during the global financial crisis to position ourselves for the years ahead. Most of the Government’s spending was mismanaged and misdirected and our whole national strategy is effectively to ride China’s economic slipstream.

When this slipstream weakens there is no Plan B. Australia cannot fall back on it’s tech sector because we we basically don’t have one, our manufacturing export sector is relatively small and thus we have to hope consumers just keep spending to keep the economy moving along. (and to help with that we bring more of them in via immigration)

So when the Chinese economy slows it seems almost certain to me that the Australian economy will tumble. How severe a recession it is will depend on factors largely outside Australia’s control, but the economy will bounce back again (at some point)…that is how economic cycles work in advanced economies.

I am not being an alarmist by the way. I still believe that the global economy will continue to slowly recover although there will be the usual pullbacks and worrying moments over the next few years. A cooling Chinese economy can be compensated by a U.S economy which is expanding again..remember the U.S economy is still enormous and bigger than Japan’s & China combined.

Australia’s economic future is still appears bright, but I think it is prudent to appreciate that our economy may run into some tough times in the years ahead. The worst of the global financial crisis may be behind most nations, but maybe for Australia, it is yet to come?


9 responses so far ↓

  • 1 Gary // Jan 21, 2010 at 6:35 pm

    Looks like stocks were down today because of the China factor. If the Chinese economy hits a speed bump then we are going to feel it here in Australia for sure.

  • 2 Anon // Jan 24, 2010 at 10:56 am

    Thanks for the great commentary Greg, you were pretty much spot on. Cant be good for commodity currencies if China slows. Even worse is the gigantic carry trade propping up the AUD – what a bubble that is.

    Ominous signs for Australian housing?
    “Just 3 per cent of people expect home prices to fall this year, compared to a third who were expecting prices to fall when surveyed early last year, according to the latest Westpac-Melbourne Institute Consumer Sentiment survey.”
    http://www.smh.com.au/national/house-sales-on-the-boil-as-confidence-returns-20100122-mqou.html

    Do you think the RBA will raise rates at next meeting Greg? I see new housing finance fell off a cliff recently.

  • 3 Greg Atkinson // Jan 24, 2010 at 1:18 pm

    Anon I am not very good at picking what the RBA will do. I believe they have already raised rates too far and should take a break this time around. Before fighting inflation I reckon it would be best to see how China goes because if the Chinese ease off buying commodities, then the RBA might need to deal with a possible recession.

    They should also allow the higher rates and the reduction in the first home buyers grant to trickle through…surely this will slow down house prices this year or?

    Anyway I was not that nervous about house prices last year but I am this year. After reading the article you posted I am even more nervous!

  • 4 Anon // Jan 24, 2010 at 2:08 pm

    “Anon I am not very good at picking what the RBA will do. I believe they have already raised rates too far and should take a break this time around.”

    Yeah I agree. I think from memory we were both stunned as to the RBA raising in the first place. They like to be first for the sake of it?

    “They should also allow the higher rates and the reduction in the first home buyers grant to trickle through…surely this will slow down house prices this year or?”

    Hmm…logic would suggest that house prices should come down, but I wouldn’t be surprised if we’re wrong again !
    I cant see any realistic catalysts that could cause a house price rise, but as Paul Tudor says the last 30% of the rise is usually pure irrationality with no explaination.

    “Anyway I was not that nervous about house prices last year but I am this year. After reading the article you posted I am even more nervous!”

    Yeah its amazing how people can go from bearish to complacent. 33% to 3% and nothing has changed 😉 The bubble is now bigger !

    Will be interesting to see how events unfold.

  • 5 Greg Atkinson // Jan 27, 2010 at 9:57 am

    Anon yes we were both stunned when the RBA started raising rates. If the stock market keeps sliding backwards and more companies report lower than expected earnings then they might at least stop raising rates for 6 months?

    We can clearly see again today how economic events in China have a big impact on investor confidence in Australia. If investors continue to remain spooked then this will have an impact on the real economy.

    Personally I thought 2009 would have been tougher on the Oz economy, but maybe 2010 could be the year the GFC really hits Down Under?

  • 6 Anon // Jan 28, 2010 at 9:57 am

    “Median national house prices rose 4.8 per cent in the December quarter, bringing the rise for 2009 to 12.1 per cent.”
    http://www.news.com.au/money/property/house-prices-at-all-time-high/story-e6frfmd0-1225824213617

    Panic buying and momentum before the scale back of the FHOG?
    Its remarkable how strong housing prices have been.

  • 7 Greg Atkinson // Jan 28, 2010 at 12:43 pm

    I am amazed about how well house prices have done. I was never in the “house prices crash of 2009” camp but I did think prices would remain fairly flat. Call me silly (and I am) but I reckon they will come down a touch this year. Can people still be willing to take on debt with higher interest rates and the global economic outlook still uncertain?

  • 8 Ralph // Feb 2, 2010 at 3:02 pm

    Yes, it’s all about China and increasing house prices, with no plan B.

    I think governments and companies do pause momentarily to consider what might happen if China slows down and/or house prices come off the boil somewhat. But then they just shake their head and say “nah, that won’t happen to us – we’re Australia and we’re different” and just plough on. I reckon the alternatives are just too scary to contemplate, so it’s easier to pretend the issues aren’t there.

    I too was a little shocked at what happened to house prices. The FHOG was probably even more successful than anyone intended it to be. We now just wait to see what the reaction is now that so much demand has been brought forward. My gut feel is that Dudd & Goose will be $hitting themselves at the thought of reduced take-up of credit that they’ll be seriously considering what form of stimulus they can bring in to keep house prices high.

    Everyone said that 2009 was the year to watch, but with the stimulus in all its forms finally washing out, I think 2010 really will be the interesting one.

  • 9 Greg Atkinson // Apr 14, 2010 at 3:39 pm

    Ralph I also think 2010 is shaping up as a very interesting year! I have also noticed that warnings about the Chinese economy are now finding their way into the mainstream media and a few people are even writing about how Australia will fare if the Chinese economy slows.

    For me it isn’t if..but when, and as sure as night follows day, the Chinese economy will slow and enter a recession at some point.

    Why do people always seem to latch onto the belief that there is such a thing as a “miracle economy”? There isn’t..all economies go through cycles, it is just a matter of how bad or good they are.

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