Can China once again rescue Australia at its hour of greatest need?

China rescue Australia economy trade war recession stimulus growth
China has reduced its economic growth target for 2019 to 6-6.5%.

It is no secret that following the global financial crisis it was China’s dramatic stimulus measures – along with some of our own – that rescued Australia’s economy and kept it growing when many other economies around the world went straight into recession.

Australia now hasn’t had a recession for 27 years which is a record in the developed world but the GDP figures released this week were very weak at just 0.2% for the December quarter, taking the annual growth rate for 2018 down to 2.3%.

Per capita growth now negative

Even more alarmingly, per capita growth was actually negative, shrinking 0.2% in the fourth quarter following on from a 0.1% decline in the third quarter.

It was only by adding more people through immigration that the growth turned barely positive, to just 0.2% for the fourth quarter.

All, of which, means Australia could be heading for a recession if falling growth turns negative for two quarters unless the figures naturally turn around or some external force helps to boost our economy.

No local stimulus likely

This time around it is unlikely that any Federal Government stimulus measures will arrive in time, particularly as government spending is already the biggest contributor to Australia’s growth and we will face a federal election in May, postponing any further stimulus measures and adding to economic uncertainty.

Some of the election promises, such as labor’s raft of tax changes, also bring with them the potential to spook or delay investment decisions until well after the election.

All of which leaves the possibility of an external boost from China – our biggest trading partner – as one of very few realistic ways that Australia’s world beating 27 years without a recession can be guaranteed to extend.

China stimulus on the way

Fortunately for the lucky country, China is once again bringing in a new stimulus plan, even though it is more targeted and smaller than the one it introduced after the GFC.

China has now lowered its goal for economic growth to 6-6.5% for 2019 and is still grappling with a debt legacy and the trade stand-off with the US.

However, it has also announced a big stimulus plan with a cut of 3% to the top bracket of value added tax (VAT), which will boost the manufacturing sector.

It has also made a 1% cut to the 10% VAT bracket.

Analysts have estimated the VAT cuts are equal to around $170 billion, which is a serious amount of money even in a country as large as China and there will be further reductions in the tax burdens for major industries, including lower tax and welfare fees.

Trade war could be over?

The other potential positive for the Chinese economy is that the enduring trade war with the US is hopefully close to reaching a resolution that would lift most or all US tariffs for China as long as Beijing follows through on pledges ranging from better protecting intellectual-property rights and buying lots of American products.

While a US trade deal may not seem to directly benefit Australia and could hurt a few of our exporters, if Chinese economic activity was to increase, that would involve importing more of Australia’s biggest bulk commodity exports such as coal and iron ore.

Slower Chinese growth still significant

The other thing to remember about China is that even if its level of economic growth was  in the intended range of 6-6.5%, that increase is on a much larger China than previously.

The size of the Chinese economy has been roughly doubling in size every decade for the last 30 years.

So, a 6% growth rate in 2019 is the same as a 12% Chinese growth rate in 2009, so it is far from a shabby experience for Australia’s predominantly bulk commodity exports.

Another Chinese-led Australian economic growth recovery is far from a certainty but with Australia’s level of economic growth stalling and government economic leadership in a state of flux, it might be one of very few avenues left to avoid a recession.

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