The Australian economy has grown for 25 years without a recession, a period where two-way trade with China has grown from A$150 billion (US$108 billion) to A$750 billion (US$539 billion) per year.
China, the world’s second largest economy, is now Australia’s top trade partner and its main destination for iron ore shipments, the latter nation’s top export commodity. China is also Australia’s second largest destination for coal exports.
Combined, the two are worth A$120 billion per year, equivalent to roughly 30% of all Australia’s foreign sales, official statistics show. Australia’s exports to China have surged 56% since 2012-13, official statistics show.
Clearly, the 21st century prosperity and growth of both nations is inextricably linked, with China’s economic miracle built with significant help from Australian raw materials. In 2017-18, Australia’s total trade with China (A$194.6 billion) was bigger than the US and Japan (A$147.8 billion) combined.
This is why, with question marks looming large over the sustainability of China’s economic growth in the face of the US trade war, there are also doubts about the Australian economy’s ability to maintain its recession-proof record.
Global financial analysts are now fixating on the Australian dollar (AUD) as an early sign of weakness. Without full convertibility of China’s yuan currency, the AUD is often seen as a proxy for market sentiment on China and has become an important unit in global foreign exchange markets.
Although Australia is the world’s 13th largest economy, it’s dollar is the world’s fifth most traded currency. The AUD fell 10% over the course of 2018, making it the worst performing G-10 currency measured against the US dollar.
Earlier this year, the AUD – which was at US$1.10 five years ago – fell below 70 US cents for the first time in a decade.
Although it has rebounded to around 71 US cents, vultures are still circling among currency traders, with one London-based strategist with BNP Paribas predicting in mid-January it could dip 30%, largely due to the slowdown in China.
It is not an unanimous view, however, and even if the AUD does fall precipitously there are some in the business community who would not necessarily view a steep depreciation as an economic disaster.
Others view a softening AUD not as a proxy of China’s emerging weakness, but as a reflection of the interest rate differential with the US, where rates have risen while Australia’s have remained unchanged.
The Reserve Bank of Australia (RBA) has historically been relaxed about a weaker AUD, seeing it as good for exporters, including commodity exporters, who sell in USD and for on-shore export industries such as tourism and education, the latter now the country’s third largest industry.
The RBA expects the AUD will remain at around its current level of 70-72 US cents for much of 2019 and will continue to be a factor in stimulating economic growth, along with record low interest rates set officially at 1.5%.
Certainly, there is a downside from China’s slowdown, but there are mitigating factors too. On the one hand, Chinese demand for iron ore may slip, but global iron ore prices are nonetheless now surging.
Analysts had forecast a bleak year for iron ore in 2018, but prices rebounded in the second half of the year and have kept moving upwards.
Chinese steel mills may have stockpiled Australian coal, but overall Chinese demand has not collapsed and there is no sign either that global demand for Australian coal is falling. In fact, coal is set to overtake iron ore this year as Australia’s biggest commodity export.
While iron ore and coal exports have long been drivers of Australia’s economy, they were joined in 2018 by liquefied natural gas (LNG), as major projects came on stream around the country.
In 2019, China is set to quadruple LNG imports, and Australia is forecast to overtake Qatar as the world’s largest LNG exporter as exports head towards A$50 billion.
In some areas, too, the US-China trade war has been good for Australia, particularly in agricultural and food exports.
Chinese drinkers have acquired a taste for wine, and with US products now caught up in the trade spat, new opportunities are rising for the export-geared Australian industry.
Only this month, Australian exporters cheered a fifth round of tariff cuts forged under a bilateral free trade deal with China, which cut import duties not only on wine but also seafood and a raft of other agricultural products.
So while a lot of attention is being paid to the downside of the China-Australia economic relationship, there is another view which sees the pessimism as overstated and a product of economic shadenfreude.
In reality, the dangers to Australia’s economic growth are more domestic than international in origin.
A rapidly cooling property market and a credit squeeze from big lenders could flow through to consumer confidence and stall economic growth currently ticking along at an annualized 2.8%.
Chinese buyers may be exiting the property market, but a softening AUD is encouraging them to visit as tourists, spending A$11.3 billon last year, equivalent to over 25% of total tourism receipts, and enroll as students at Australian universities.
China’s economy is expected to slow to 6.3% this year, some analysts predict, which if accurate would be its slowest pace in 29 years.
To use an old analogy, that might be an economic “sneeze,” but it doesn’t necessarily mean that Australia’s economy will “catch a cold” and reverse a quarter century of codependent strong growth.