Trade war risk to econ­omy

RBA warns of neg­a­tive im­pact and growth slide

The Courier-Mail - - BUSINESS - JOHN DAGGE

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.

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