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Australia falls off one cliff, another looms

15 May 2014  |  Economics

 Au CliffThere is great debate over the effect the Budget will have on the economy, which will affect the investment environment. The general agreement is that there will be some fiscal drag as the government reins in spending. 

But the biggest drag will be the fall in capital expenditure, which is acknowledged in the Budget. Business investment dropped 1.5% in 2013/14 and was predicted to fall 2% in 2014/15. The predictions are now -4% for this year, -5.5% for next year and -3.5% in 2015/16.

The reason is the end of the mining boom:

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The terms of trade correction has also been written down further still from -5% this year and next in the MYEFO to -5% and -6.75% next year:

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The interest on government debt is below. Not exactly a "crisis":

The need for fiscal prudence is there, however. Max Walsh in the AFR argues that times will get tougher:

"We have a global situation of slow growth and threatening deflation. The idea that we could be entering an extended period of secular stagnation is being seriously canvassed.

Australia, as a medium-sized, open economy is particularly vulnerable because of what have been up to now our greatest strengths – our resource endowments and proximity to the fastest-growing of all regions, Asia.

Looking at what could go wrong now, it is evident that the challenges facing Australia are greater than we have seen so far this century.

The first can be called the transition of Asia. Most of the time, we concentrate on what is happening in China. China is the anchor of the Asian region. Australia, for example, sells 26 per cent of its exports to China. However, the rest of Asia, including Japan and India, accounts for another 37 per cent.

China has been the engine room of Asian growth. Since it joined the World Trade Organisation in 2002, emerging Asia’s share of global gross domestic product has risen from 11 per cent to 21 per cent.

Being part of China’s supply chain has been important for the whole of Asia, but so too has the inflow of capital from Western economies, where interest rates have been held at record lows in an effort to stimulate local activity.

The slowdown of China is hurting export sales from the rest of Asia. There has also been a fall-off in Asian exports to the developed economies. For example, since the beginning of 2014, imports of consumer goods into the US have grown at less than half the rate of domestic spending, reversing a relationship that has held since the 1960s.

The Asian export boom underwrote high debt levels across most of Asia. Now the boom is fading, just as we are beginning to see higher interest rates.

Asia’s golden era, which can be dated from 2008, could end up in a debt trap."

 

 

 


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