Trade row ‘growing risk to economy’
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.