Aus­tralia’s wors­en­ing woes are a warn­ing sign for neigh­bour­ing Asia

Mint Asia ST - - News - WIL­LIAM PE­SEK

In the 25 years since Aus­tralia had its last re­ces­sion, its cen­tral bank with­stood more crises than it can count: Asia’s 1997 melt­down, Wall Street’s 2008 crash, Ja­panese de­fla­tion, US Fed­eral Re­serve tight­en­ing cy­cles. But it’s taken the likes of Don­ald Trump to re­store the laws of eco­nomic grav­ity.

Re­cently, Re­serve Bank of Aus­tralia gover­nor Philip Lowe named the US pres­i­dent’s poli­cies the big­gest risk to the global econ­omy. Aus­tralia’s quar­ter-cen­tury growth marathon, too. That might sound alarmist. The na­tion grew an an­nu­al­ized 3.1% in the se­cond quar­ter, beat­ing ex­pec­ta­tions. Below the sur­face, though, are clear signs that Aus­tralia’s long growth run looks tired.

Tepid house­hold in­come growth, for ex­am­ple, is re­strain­ing con­sumer spend­ing, or about 60% of the econ­omy. Now, fall­ing commodity prices deepen the plot.

The tum­ble in goods prices bears Trump’s fin­ger­prints. Though the White House’s trade war tar­gets Beijing, Aus­tralia’s re­source-rich econ­omy is ar­guably the big­gest lever­aged bet on main­land growth.

China’s rapid growth and vo­ra­cious ap­petite for iron ore, coal, cop­per, nickel and alu­minium to feed an epic in­fra­struc­ture boom pro­vided a pow­er­ful tail­wind Down Un­der.

That ex­po­sure is rapidly mor­ph­ing into a li­a­bil­ity as Trump’s tar­iffs slam the main­land—and in ways that should worry Asia.

Sin­ga­pore and South Korea show tell­tale signs of wear. As open, ex­port-re­liant economies, both play a weath­er­vane role for global-trade in­flec­tion points. And at the mo­ment, both are flash­ing some­thing ap­proach­ing red.

Man­u­fac­tur­ing ac­tiv­ity in Sin­ga­pore shrank 0.1% in the se­cond quar­ter from a 21.3% jump in Jan­uary-march pe­riod. The con­struc­tion sec­tor plunged 14.6% be­tween April and June.

In Korea, mean­time, ex­ports stopped on a dime in June, con­tract­ing 0.1% ver­sus a 13.2% surge in May.

Ja­pan cen­tral bank’s “tankan” sur­vey showed a three­p­oint drop in busi­ness con­fi­dence be­tween March and June —the pe­riod in which Trump be­gan rolling out tar­iffs. Trump’s threat­ened 25% tar­iff on car im­ports would sav­age Ja­pan Inc.

Aus­tralia raises the alarm fac­tor partly be­cause an econ­omy im­per­vi­ous to global fall­out is now vulnerable. It’s a con­cern, too, be­cause of what trends there say about China’s eco­nomic health.

It’s be­come a pun­di­tariat cliché to doubt the ve­rac­ity of Beijing’s data. To fill in the blanks, econ­o­mists track ev­ery- thing from elec­tric­ity usage to rail cargo ship­ments to loan dis­burse­ment to Alibaba’s on­line sales.

An­other ap­proach: track places most tied to main­land zigs and zags within global sup­ply chains. That means Sin­ga­pore, Korea, Tai­wan and now Aus­tralia.

Trou­ble is, there’s no telling where Trump will stop— es­pe­cially as China’s Xi Jin­ping re­tal­i­ates.

Ig­nore Trump’s claims of a “deal” with the Euro­pean Union. It’s just a deal to dis­cuss cut­ting levies, talks that could be un­done with one early-morn­ing Trump tweet. Trump is still eye­ing as many as $505 bil­lion of Chi­nese tar­iffs, based on the amount of goods the main­land sent Amer­ica’s way last year.

That gets us back to RBA chief Lowe, who’s as much on the front lines as any mone­tary of­fi­cial.

On 3 July, Lowe’s team left the bench­mark cash rate alone at 1.5%. There had been spec­u­la­tion that solid growth might give the cen­tral bank con­fi­dence to get the rate a step fur­ther away from zero.

In­stead, Lowe is bow­ing to signs China is cool­ing, hous­ing prices are soft­en­ing and com­modi­ties are tak­ing hits. And then there’s Trump.

“One un­cer­tainty re­gard­ing the global out­look stems from the di­rec­tion of in­ter­na­tional trade pol­icy in the United States,” Lowe said. And yet, so much has tran­spired in the last month to think Lowe’s views have dark­ened since then. That in­cludes a tar­iff arms race and Trump’s step­ping up ef­forts to weaken the US dol­lar.

It’s not like Mal­colm Turn­bull can do much to shield Aus­tralia from Trump’s wrath. Things be­tween Aus­tralia’s prime min­is­ter and Trump got off to a dis­mal start in Jan­uary 2017. Trump ef­fec­tively hung up on Turn­bull over a dis­agree­ment in­volv­ing asy­lum seek­ers. The best Can­berra can do is man­age the Trump re­la­tion­ship to limit the eco­nomic fall­out.

That means stay­ing nim­ble with mone­tary and fis­cal pump-prim­ing in the short run. The longer-run chal­lenge is to di­ver­sify Aus­tralia’s econ­omy away from China. For now, though, head­winds bear­ing down on Can­berra are an omen of things to come in a re­gion caught be­tween two brawl­ing giants.

Wil­liam Pe­sek, based in Tokyo, is a for­mer columnist for Bar­ron’s and Bloomberg and au­thor of Ja­paniza­tion: What the World Can Learn from Ja­pan’s Lost Decades.

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