Trade war risk to economy
RBA warns of negative impact and growth slide
A RISE in trade tensions between China and the US poses a growing risk to the health of the nation’s economy, the Reserve Bank has warned.
But Australia’s central bank is not fazed by the fall in house prices in key capitals such as Melbourne and Sydney or worried about the ability of homeowners to repay their loans as interest rates rise.
The assessment was delivered in the RBA’s latest twice-yearly Financial Stability Review, released yesterday.
The health check on the nation’s economy comes during a week in which global markets were shaken by a sharp selldown on Wall Street.
“Downside risks to growth have become more prominent since the previous review, particularly due to the rise in trade protectionism,” the RBA said.
While the impact of the trade war between the world’s two biggest economies had so far been “relatively modest”, this might not remain the case, it said. “If the imposition of trade barriers were to intensify, or if it materially affected business sentiment and decisions, the negative impacts on economic growth could be more significant,” the report said.
“Australia would be sensitive to a sharp contraction in global growth or dislocation in global financial markets because of the importance of trade and capital inflows.”
China’s trade surplus with the US widened to a record $US34.1 billion ($A48 billion) last month as its exports to America rose by 13 per cent over a year earlier despite a worsening tariff war, according to data released yesterday.
US investors fretting about the trade tensions with China and also reassessing their expectations around the pace of interest rate hikes triggered this week’s global share rout.
The RBA pointed out the era of ultra-low interest rates spawned by the Global Financial Crisis meant investors had been willing to accept more risk for less return. This might leave them exposed to unexpected increases in interest rates or a global shock, it cautioned. “With the price of risk so low, there is a heightened possibility that an increase in expected or realised inflation or a negative growth shock could result in a significant and widespread rise in volatility and repricing in financial assets,” the RBA said. “Some investors may not be well prepared for such repricing, with the potential for some large losses and reactive sales of assets.”
AUSTRALIA’S sharemarket ended in positive territory yesterday but over the week lost almost 5 per cent of its value as investors followed their counterparts in the US and dumped stocks.
The ASX 200 closed 11.8 points higher yesterday at 5895.7 points despite another negative lead from Wall St. The Dow Jones closed 2.13 per cent lower overnight on Thursday.
Analysts say shareholders were rattled this week by three key issues: the potential for faster rate rises in the US, the worsening China and US trade war and the threat of tougher government regulation for the big US technology companies.
Rising interest rates push up returns on bonds – broadly IOUs issued by governments and companies – and can make such investments more attractive than shares.
The trade war with China, meanwhile, threatens the profits of US companies exporting to that market, and tougher regulations for tech companies are raising doubts about the outlook for their earings and the true value of their shares. In a double-whammy for companies and the sharemarket, higher interest rates also mean businesses are forced to pay more for their debt, reducing their profits. The market volatility this week should not come as a surprise, according to AMP Capital chief economist Shane Oliver. He said the conditions that are helping win more investors over to bonds have been building for more than a month. “Although our Reserve Bank has interest rates on hold and Australia is not in a trade war with China, Australian investors worry that impacts on the US will affect the global economy and could mean less demand for our exports generally,” Dr Oliver says. The US market is now down about 7 per cent from its September high, while Australian shares have also fallen 7 per cent since August.