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?