Trade row ‘grow­ing risk to econ­omy’

The Weekend Australian - - BUSINESS REVIEW - JAMES GLYNN OUT­LOOK DOW JONES NEWSWIRES

Sharply es­ca­lat­ing trade ten­sions be­tween the US and China rep­re­sent a grow­ing ex­ter­nal risk to Aus­tralia’s eco­nomic out­look, the Re­serve Bank has warned.

In a six-monthly re­port card on fi­nan­cial sec­tor sta­bil­ity, the RBA said Aus­tralia, a ma­jor ex­porter of min­eral and en­ergy prod­ucts to the global econ­omy, would be in the fir­ing line of any slow­down brought on by the wors­en­ing trade spat.

“Aus­tralia would be sen­si­tive to a sharp con­trac­tion in global growth or dis­lo­ca­tions in global fi­nan­cial mar­kets be­cause of the im­por­tance of trade and cap­i­tal in­flows,” the RBA said.

“Down­side risks to (global) growth have be­come more prom­i­nent since the pre­vi­ous re­view,” the cen­tral bank added.

“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 com­ments come as global growth fore­casts have started to be low­ered with econ­o­mists fac­tor­ing ris­ing threats to global trade.

Aus­tralia’s bur­geon­ing ex­ports of nat­u­ral gas and record ex­ports of iron ore to Asia are ma­jor driv­ers of the econ­omy. Any last­ing slow­down in China or broader-Asia would im­me­di­ately be felt Down Un­der.

“A wors­en­ing in ex­ter­nal con­di­tions could see down­turn in the do­mes­tic econ­omy, re­duced avail­abil­ity and higher cost of off­shore fund­ing, and falls in as­set prices,” the RBA said.

Al­ready the Aus­tralian dollar, which is traded in mar­kets as a liq­uid proxy to China, has weak­ened sharply in the last year, fall­ing from around US80c to just above US70c now.

Many fore­cast­ers ex­pect a fur­ther fall be­low US70 next year.

The re­treat in the cur­rency is partly due to widen­ing in­ter­est rate dif­fer­en­tials be­tween Aus­tra- lia and the US, and jit­tery emerg­ing mar­kets.

But the drop also re­flects what the In­ter­na­tional Mon­e­tary Fund now de­scribes as a dim­ming global growth out­look.

On the do­mes­tic front, the RBA con­tin­ues to note risks around record lev­els of house­hold debt, but ap­pears to be more re­laxed on the is­sue.

“This does not ap­pear to be a large risk to the fi­nan­cial sys­tem. The ma­jor­ity of this debt is well se­cured, with only a small por­tion hav­ing a high loan-to-value ra­tio,” it said.

“The pace of in­crease in house­hold in­debt­ed­ness has slowed in ag­gre­gate, house­holds ap­pear well placed to man­age their obli­ga­tions, given cur­rently low in­ter­est rates and the im­prove­ment in lend­ing stan­dards,” the RBA added.

Still, large debt bur­dens con­tin­ued to pose a broader threat to con­sumer spend­ing and eco­nomic growth, it added.

Some pock­ets of house­hold fi­nan­cial stress were ev­i­dent, but the RBA added that “this is not wide­spread”.

The na­tion’s hous­ing mar­ket has faced stiff­en­ing head­winds as its bank­ing reg­u­la­tor con­tin­ues to en­force tough cri­te­ria for mort­gage lend­ing.

Con­cerns around record con­sumer debt and flat wages growth in re­cent years has prompted a crack­down on riskier lend­ing, sti­fling credit to fund the buy­ing of homes, es­pe­cially for prop­erty in­vestors.

House prices have been slid­ing over the last year, led by weak­ness in Syd­ney and Mel­bourne.

The drop has come de­spite in­ter­est rates re­main­ing at record lows, with econ­o­mists fore­cast­ing the slide could ex­tend into 2020.

Econ­o­mists fear the pres­sure on house prices will even­tu­ally dampen con­sumer sen­ti­ment and spend­ing, re­sult­ing in the econ­omy slow­ing.

Mor­gan Stan­ley said this week that the like­li­hood of a hard land­ing in Aus­tralian prop­erty was in­creas­ing.

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