‘Shortages of goods overstated’

China supply issues downplayed

AUSTRALIA could face shortages in chemicals and machinery but will probably avoid widespread supply chain disruptions caused by a Covid-19 wave in China.

That is the findings of analysis undertaken by BetaShares chief economist David Bassanese, despite widespread concern that an increase in illness could delay the manufacturing and export of key products around the world. Mr Bassanese said concerns about a shortage of critical goods had been overstated – and the type of imports likely to be affected “account for a relatively small share of our economy”.

Of Australia’s $450bn in imported goods and services in the 12 months to June 30, $103bn, or 23 per cent, came from China.

Mr Bassanese said China accounted for two in three of the most vulnerable products identified by the Productivity Commission (in a 2021 report), although he added that many were not deemed essential or critical to short-run needs.

“Some of the potentially critical areas that could be affected … include chemicals to treat water and produce certain pharmaceuticals. Another area is the supply of personal protective equipment,” Mr Bassanese said.

But Australia Institute executive director Richard Denniss has warned that the flow-on effect of China’s surging Covid cases could wreak havoc on Australia’s economy. “If Chinese production declines significantly, we’re going to see higher prices and more inflation. That’s inevitable,” Dr Denniss said.

Product shortages in manufacturing and constructions could also be a recurring factor. “There are 800,000 employed in manufacturing in Australia but a lot of Australian manufacturing still relies on components that are made overseas, many of which are in China,” he said.

“After decades of Australia outsourcing so much manufacturing to China, we’ve made ourselves so much more vulnerable to China’s trade policy, health policy, health outcomes and everything else.”

Dr Denniss said if the Chinese economy slowed down significantly, the demand for Australia’s iron ore and coal would probably decline, affecting commodity prices.

“In some sense, we’ve been lucky in the past with our exposure to China, but this time around the opposite could well be the case,” he said.

Earlier this week, Jim Chalmers identified the surge in China’s Covid-19 case numbers as one of the “key risks to our economy”.

“We are heavily reliant on Chinese markets and Chinese workforces for a lot of the goods in our economy,” the Treasurer said. Ahead of “a challenging year for the global economy, a big part of that, in a whole range of industries, will be the pressure on supply chains brought about by this (wave).”

In a separate note on Thursday, S&P Global said China’s easing of Covid-19 rules would “propel a choppy economic recovery”.