19 September 2015
by Peter Jones
Is the Australian economy facing recession?
Stockmarket gyrations and slowing growth figures have raised renewed questions about the health of the Australian and world economy.
At the height of the mining boom Australia’s elite came up with a range of ambitious perspectives for China’s growth. The consulting firm McKinsey reckoned China’s urban population would hit one billion by 2025. On that basis BHP Billiton and Rio Tinto decided China would be producing a billion tonnes of steel between 2025 and 2030, and they would supply the bulk of the iron ore.
The figure soon found its way into government reports and corporate investment pitches, helping fuel the largest mining investment boom in Australia since the gold rush of the 19th century.
As the Chinese economy slows these perspectives are looking doubtful. According to the Chinese government’s top steel-industry forecaster production started to decline last year from a peak of 800 million tonnes, and that trend looks set to continue. Meanwhile Brazil’s Vale is expected to ramp up production to 450 million tonnes of iron ore by 2018, which will make it a larger producer than BHP and Rio combined.
The official figures have China’s real GDP still growing at just above 7 per cent a year, which might look healthy compared to the 0.2 per cent growth Australia recorded last quarter. But the official figures are notoriously unreliable. Based on more direct measures of economic output, like steel production figures, mainstream economist Harry Wu has estimated that GDP growth in China during 2012 was already as low as 4.1 per cent.
Concerns about China were reinforced last month when a closely watched manufacturing index recorded its worst reading since the global financial crisis. Stock markets responded with sharp falls around the world. This highlights the extent to which growth elsewhere now depends on growth in China.
Chinese authorities responded by buying up stocks on the Shanghai exchange and threatening to prosecute traders for “malicious short-selling”. This, combined with the now less likely prospect that the US Federal Reserve will increase interest rates this month, has helped to stem further losses for now. But low interest rates do nothing about the underlying problems of profitability in the US, China and elsewhere.
Global growth continues to stagnate in the wake of the most serious crisis of capitalism since the 1930s. If the Fed leaves rates at zero this also risks exacerbating what already looks to be a stock market bubble.
For some time the Reserve Bank has been trying to engineer a transition from export-led growth, mainly in mining and mainly to China, to growth driven by housing construction.
Australia has some of the highest property prices in the world because growth in housing investment fell below the level needed to keep pace with demand during the boom. It was more profitable for businesses to invest in building mines than it was to build houses, so, combined with the effect of low interest rates, prices for existing houses and apartments kept increasing.
But while there has been some increase in housing construction, it hasn’t been close to enough to make up for the drop-off in investment in mining.
And it certainly hasn’t put a dent in housing prices, especially in Sydney, where the median house price is over a million dollars.
With unemployment at around its highest rate in 13 years, the Coalition are clearly feeling the heat on the issue of jobs.
The Coalition also sound far from convinced about their “dams in the North, subs in the South” strategy for economic development. Thankfully for northern Australia’s ecosystems the end of the commodities boom has not made turning the rivers inland appeal to wider sections of business than Barnaby Joyce’s mates. And Abbott’s backflip on sourcing subs from Japan is transparently motivated by the fear of losing marginal seats in South Australia.
What we actually need aren’t jobs to make military hardware but people paid to build renewable energy and public transport infrastructure. But this is something neither major party is offering.
Instead the Liberals have been trying to wedge Labor over their hesitation in supporting the China Australia Free Trade Agreement (ChAFTA). ChAFTA is important to business for obvious reasons, but given the recent fall in the Australian dollar hasn’t led to an export-driven growth spurt, a few cuts in tariffs are unlikely to either.
Perspectives for the Australian economy are bleaker than for some time.