As the superpower’s downturn begins to hit Australia by $7.5 billion a month, fears of a knock-on effect rise, and ominous signs are beginning to emerge for the Chinese economy.
The country of 1.4 billion people has never fully recovered since taking a big hit in the second half of 2022 when the Chinese government scrapped strict pandemic measures that had weighed heavily on growth.
At the time, many expected China to become the world’s most powerful economy in the not-too-distant future and it was hoped that the country would limit the health impacts of the coronavirus and recover.
However, it wasn’t all smooth sailing.
Beijing recently unveiled worrying growth forecasts for the next few years, with GDP projected to post a recession-like 3.0% growth in 2022 and then slow to 5.0% in 2024 after recovering slightly to 5.2% last year.
However, this percentage is projected to fall further to 4.5% in 2025 and 3.8% in 2026.
These figures do not paint a particularly optimistic picture of a recovery for China anytime soon, and it’s all bad news for Australia.
Australia loses $7.5 billion every month
It’s often said that China and Australia have a close and important trading relationship, and that’s because Australia buys a lot of Chinese-made products, but Australia also buys a lot of Australian-made products, and what Australia sells to China accounts for a third of Australian exports.
This has fuelled Australia’s economic prosperity over recent decades, increasing national income and stimulating economic growth even at tough times for the rest of the world.
But a slowdown in China’s economy poses potential risks to Australia, as China’s economic slowdown has already hit the Australian economy hard.
A large part of this trade relationship relies on commodities – put simply, the things we dig out of the ground and sell to China for use as building materials.
The Reserve Bank of Australia’s (RBA) commodity price index, which reflects the relative importance of Australian exports, has fallen sharply by 26% in Australian dollar terms since its October 2022 peak.
The price of iron ore, Australia’s largest export to China, has fallen from over US$150 a tonne in early 2022 to US$135 a tonne in early 2024, and is currently around US$107 a tonne.
From a macro perspective, the damage this will do to the Australian economy is staggering.
Falling commodity prices have contributed to a decline in Australia’s monthly international trade surplus, which has fallen from roughly $12.5 billion to $15 billion in 2022 to around $5 billion to $7.5 billion per month.
The two figures at the top end of each range combined amount to a monthly loss of $7.5 billion.
Regarding signs from Chinese factories
China’s manufacturing activity contracted for a second straight month in June, data showed on Sunday, highlighting the country’s fragile economic recovery ahead of a key political gathering expected to focus on deepening reforms.
According to China’s National Bureau of Statistics (NBS), the manufacturing Purchasing Managers’ Index (PMI), a key indicator of factory output, came in at 49.5 in June, exactly the same as in May.
The latest official reading was in line with Bloomberg forecasts based on a survey of economists.
A PMI reading below 50 indicates a decline in activity, while a reading above 50 indicates an expansion in activity.
Chinese politicians are due to meet in Beijing in mid-July for a much-anticipated political rally expected to focus on economic recovery.
The contraction in manufacturing is a worrying sign for the world’s second-largest economy, which has struggled to regain momentum since the pandemic.
China’s non-manufacturing PMI, which takes into account activity in the services sector, also expanded to 50.5 in June, the National Bureau of Statistics said on Sunday.
But despite the growth, the reading was down from 51.1 the previous month and below the 51.0 forecast in a Bloomberg survey.
Zhao Qinghe, a statistician at the National Bureau of Statistics, said in a statement on Sunday that the domestic economy “maintained an overall expansion” in June but warned that “the foundation for continued recovery and improvement needs to be consolidated.”
Among the obstacles facing policymakers are a protracted debt crisis in the once-booming real estate sector, sluggish consumption and high unemployment, especially among young people.
Chinese President Xi Jinping said in a speech on Friday that authorities were looking at “far-reaching” reforms to “shape a more market-oriented, lawful and international business environment.”
Inflation concerns grow in Australia
Meanwhile, Australia is facing its own economic woes with the latest figures showing inflation rising.
There are fears that a series of cost-of-living cuts that came into effect on Monday will fuel inflation and lead to further increases in interest rates.
The Albanese government has defended the handouts, which include tax cuts for all taxpayers, arguing inflation will eventually come down.
Premier Anthony Albanese and Treasurer Jim Chalmers both touted other measures such as the stage three tax cuts, a $300 energy credit and wage increases for low-income workers, while denying they would overly stimulate the economy.
Speaking during a visit to an Indian sweets factory in Melbourne, Prime Minister Albanese said the Government was doing all it could to keep inflation down while helping Australians.
“Our goal is to make sure we get through the short-term issue of families being able to pay their bills,” he said.
“But we also want to make sure that our economic policies are the right ones. That’s why we’ve created a budget surplus that puts downward pressure on inflation.”
He said the Sweet Magic factory was the right place to discuss the government’s economic plans “because our goal is to hit the sweet spot.”
“It’s a fine balance between putting downward pressure on inflation while easing the cost of living,” he said.
“2.6 million bonus recipients will also see a wage increase and 13.6 million Australian taxpayers will receive a tax cut.”
The CPI reading hit 4% in May, raising concerns that the RBA may raise interest rates from 4.35%, the highest level since late 2020.
Chalmers said he expected inflation to remain subdued, even though the May figure and the first quarter figure of 3.6 per cent were above the RBA’s target of 2 to 3 per cent.
The Australian Bureau of Statistics is due to release the key June quarter figures on July 31, just days before the RBA’s next board meeting on August 6.
Reserve Bank of Australia (RBA) Governor Michelle Bullock has consistently said the bank would raise interest rates again if necessary to curb inflation.
The Opposition launched its attack on Sunday, with senior party leader Michaelia Cash saying the Government’s measures did nothing to help Australians.
“Going back to the real world, Australians are going to wake up this morning to a suffering situation because of the policies of the current government,” she told Sky News.
“This is not inflation, this is zimflation.”
— NCA NewsWire and AFP