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Bad news in China might just be good news for Australia. That may sound counterintuitive, given the two economies are so closely intertwined. But Beijing’s efforts to stimulate its slackening economy are boosting the price of iron ore, among Australia’s biggest exports. Steel mills in China are humming. Tax cuts and steps to boost consumption stand to shore up Australia in other ways.
For policymakers in Sydney, this is a welcome, if surprising, byproduct of China’s leaner times. Since the world’s second-biggest economy started cooling more dramatically in the second half of last year, analysts and investors worried about the end of the dream 28-year growth run Australia has enjoyed. Live by the China boom, die by the China boom, or so the argument went.
Perversely, a China-induced slump may be just what Australia needs to shake itself out of complacency. Skeptics — this columnist has been one of them — may have to wait a little longer. To get ahead of a slowdown, the Reserve Bank of Australia cut its benchmark interest rate to a record low of 1 percent. The reduction was the second quarter-point clip in as many months. Prior to June’s move, the rate had been steady for a few years.
This feels like fine-tuning, more than an all-out monetary assault on a sagging economy. Inflation has been below the central bank’s 2 percent to 3 percent target for too long, and an okay labour market has failed to help get there. A lower jobless rate, which cheaper money might help achieve, could do the trick.
The RBA might nip and tuck a little more. There isn’t much appetite for quantitative easing, though a live audience poll at a Bloomberg event in Sydney last month showed about one-third of attendees anticipated bond buying next year. Still, anything that dramatic may need to wait for a proper downturn, along with a spike in unemployment. RBA Governor Philip Lowe has referred to letters he receives from savers complaining about low returns on their deposits.
The statement from the RBA didn’t address China’s economy or its prospects in any meaningful way beyond acknowledging China has taken steps to support activity. Minutes of the board’s June decision, when rates were also cut, hint at Beijing’s stimulus and how it might buoy the local scene. “The increase in iron ore prices had been underpinned by supply constraints, strong demand from China and an increase in steel production,†the minutes said.
Of course, there’s more than China going on here. Population growth, largely a product of immigration, keeps economic activity ticking over. The government pledged infrastructure spending and tax cuts. There are also signs a housing bust is abating.
—Bloomberg
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previ-ously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.