Low Aussie Growth, Low China Growth. A Tough Decade For Both Economies.
Posted 19 October 20
Interview With ausbiz, 19 Octorber 2020
For reasons well understood, both China and Australia have experienced economic good fortunes over the last 20 years, but it would be wrong to describe it as a designed, integrated or strategic outcome. It is more convenience and happen-chance. There are strong prevailing forces in play, particularly in China, that we assess will see both countries lag over the next decade and that Australia will face severe and long overdue adjustment. The moniker of Australia as the Luck Country will be severely tested.
— Watch the recorded session here.
— A key point summary can be read below.
Attention is presently on China’s seemingly capricious and very Australia focussed restrictions, from barley, wine, coking coal to cotton. That said, we should acknowledge that Chinese steelmakers are sitting on very significant stockpiles of iron ore and coking coal with more still waiting to be unloaded. Political? Probably, but also a commercial reality. Conversely, Australian businesses have been refusing contracted imports from China during COVID due to weak demand. We view that these bilateral tete á tetes mask a deeper, darker reality for both China and Australia’s economic futures.
Why? Over the last decade, China’s growth rate has halved from 10% to now an ‘official’ 5%pa. For the decade ahead, we forecast China growth halving yet again to between 2% to 3%pa. We see this as largely predetermined due to China’s demographics and ageing population, increased savings and reduced urbanisation. Importantly, this does not factor in political, financial or banking crises; the latter two which could easily see China experience a recession. This is very significant for Australia's macro health and specific Australian sectors post-COVID fiscal stimulus.
- Over the medium to the long term, China’s economic growth engine is just not going to need as much from us (or others). Our growth has been anaemic but with mining having represented up to 2% of GDP growth over the last decade, this must invariably be lower. The Macro headwinds on State royalties, corporate taxation and National Income are significant.
- In specific sectors, we forsee these headwinds in Australia in the form of:
— Reduced China bulk commodity demand (and base metals) together with resourcing from closer sources (such as Mongolian coking core), headwind for the large diversified resource firms (BHP and Rio) and service-related firms (MND and Downer).
— Reduced services income: overseas students and inbound travel, headwind for tourism and airlines . This can, of course, be mitigated by other inbound nationalities, but as we see with the European Union Free Trade Agreement negotiations, this all takes time
— Reduced migration: the impact here is more difficult to ascertain, because of itself, the government sets these numbers and it may well be that skilled migrants elsewhere may come to Australia. Construction post COVID stimulus is, however, unlikely to see the high-density apartment buildup that we experienced over the last decade – infrastructure spending may well absorb much of this, but per capita growth will be a lot less.
In the short run (1-3 years) we see robust China stimulus and continued fixed capital investment and support for the banking system continuing to mask-over the medium to longer term reality (and its bad debts). For Australia, it is as if the 'stone has yet again been kicked down the path' in terms of reliance on Chinese demand. This combines with the Federal Government own pursuit of increasing domestic demand through fiscal expansion, seeking unemployment at or below 6%.
We assess that these short-term actions over the next 18-24 months as having some real punch, with early indications that residential land and house packages are back experiencing sales momentum. This is positive for the house & land operators, homemakers and the Australian focussed building product suppliers. The finance story is a bit more mixed. Banks, we observe do not want to take on new development and institutional risk. But house and home lending is right in their focus 'wheel-house' which combines nicely with the U-turn in responsible lending standards. The larger non-bank lenders focussed on residential property are likewise seeing renewed momentum. The dark spot is project funding, and this is increasingly becoming the domain of opportunistic, private funding groups to the exclusion of the banks.
We manage our Australian Equity macro positioning on a 12-15 months forward outlook basis. As we know markets themselves are forward looking, but maybe not this forward looking. Australian equity markets are yet to adjust to the lower China growth story – it is hazed by focussing on the bilateral politics and that both countries are in short term COVID fiscal expansion. This haze will lift and the reality will lay bare both economies.
Peace of Mind Investing
Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the centre of our business.
For more information on our approach to investment strategy or any other inquiries, please contact us on +613 9655 5000.
Photo by Robert Nyman