The news that Australia faces a $30 billion revenue hit over the next four years as a result of lower iron ore prices, combined with a slowdown in China’s growth, spells bad news for the Australian economy. This report looks at predictions for the wider global economy.
A crackdown on cheap credit in China is expected to help reduce the rate of China’s real GDP growth from 7.4% last year to 6.8% this year and further weaken demand for Australian commodities, according to a new report by the International Monetary Fund.
A slow-down in the Chinese economy is expected to soften demand for Australian resources needed for China’s building boom, potentially boring a bigger hole in Australian government coffers as tax receipts from mining continue to decline.
“The authorities in China are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth. Hence the forecast assumes a further slowdown in investment, particularly in real estate,” according to the IMF’s April 2015 World Economic Outlook, which also forecast global economic growth at 3.8% in 2016.
“Australia’s projected growth of 2.8% in 2015 is broadly unchanged from the October prediction, as lower commodity prices and resource-related investment are offset by supportive monetary policy and a somewhat weaker exchange rate,” the report said, predicting Australia’s growth will gradually rise to 3.2% next year.
The world economy is expected to grow 3.5% this year, up slightly from 3.4% last year, but the outlook is brighter for advanced economies than developing nations.
Winners and losers
Advanced economies are expected to increase to 2.4% this year, up from 1.8% last year thanks in part to cheap oil driving consumption and production in rich nations, the report said.
However, growth in emerging markets is expected to fall from 4.6% in 2014 to 4.3% this year, with many suffering the effects of drought, geopolitical risk and falling prices for key exports like oil.
“Large movements in relative prices, whether exchange rates or the price of oil, creates winners and losers,” said Olivier Blanchard, IMF Economic Counselor and Director of Research, adding that an ageing population, low levels of investment and missed opportunities to improve productivity were holding both advanced and developing countries back.
Drought had stymied economic growth in Brazil, while plummeting oil prices were weakening the economic outlook for Russia.
“Exporters of commodities (Australia, Indonesia, Malaysia, New Zealand) will see a drop in foreign earnings and a drag on growth, although currency depreciation will offer some cushion,” the report said. Metal prices are expected to sharply decline in 2015, the report predicted, and “the largest price decline in 2015 is expected for iron ore.”
Ratings agency Standard and Poor predicted this week that iron ore will remain below $US45 a tonne for the rest of 2015, down from its previous forecast of $US65 a tonne. Federal Treasurer Joe Hockey earlier this week warned that the iron ore price may drop as low as $35 a tonne.
The US is expected to continue its solid recovery from the global financial crisis, the report said, with the IMF forecasting GDP growth of 3.1% in 2015, up from 2.4% last year.
The outlook for the Euro Area has also improved, with GDP expected to grow by 1.5% this year, up from 0.9% last year, the report said, but added that within Europe some countries had fared better than others.
“Legacies of both the financial and the euro area crises – weak banks and high levels of public, corporate, and household debt – are still weighing on spending and growth in some countries,“ said Dr Blanchard.
A press release issued with the report said that “geopolitical tensions, stemming from ongoing events in Ukraine, the Middle East, and West Africa, could generate regional and global spillovers” and stymie economic growth in the developing world.
Forecasts for Australia
Professor Fabrizio Carmignani, from the Griffith Business School at Griffith University said Australia’s outlook was fragile and that federal government should consider carefully the effects of tightening fiscal policy in the upcoming budget.
“The slow-down in China, albeit not dramatic, it is certainly a signal that external demand for Australian exports is going to weaken in the short-term,” he said.
“The dynamics of international commodity prices do not help, in this regard, even though a realignment of the US dollar vis-a-vis the main international currencies can still support Australian’s international competitiveness.
“What is clear, however, is that Australia is in a difficult cyclical phase, and hence a further tightening of fiscal policy is not desirable. The hope is that, this time, the government will take this into accounting in formulating the budget for the next fiscal year.”
Prof Carmignani said overall, the IMF was providing a “mixed picture” with sharp cross-national differences, especially in Europe, with some countries still feeling the effects of economic contraction.
A slow-down in the performance of emerging and developing countries was due to factors such as the decline in oil prices, he said.
John Vaz, Program Director of Banking and Finance at Monash University, said the report highlighted the importance of reducing the wealth gap and strengthening the middle class in countries such as China, Russia and the US.
“Part of the reason for commodity prices stalling is that China had to slow its rate of construction. You can build so many apartments and shopping centres but people have to be able to afford to buy and live in them. China has to get the benefits shared more widely,” he said.
“The slow down in the commodities side means obviously we don’t dig as much stuff out of the ground and send it there. But China still has a lot of infrastructure to build, it’s sitting at just above 7% at the moment, so it’s not all bad and they will need to build more into the future.”
Economic instability in Russia could cause significant political risk, he said.
“Russia is really suffering from the low oil prices. Economic instability can create political instability so we may see more aggressive actions that are designed to distract from economic problems at home,” he said.
Australia’s tourism industry may benefit from brighter economic conditions in the US, he said, but warned that the Australia government needed to reduce fear, uncertainty and doubt at home arising from lack of confidence in the political process.
“There is fear about what the government will do in terms of taxes, uncertainty around the cross-benchers and doubt about whether they can execute policies. The Labor Party are enjoying strong polling but they are not really coming out with much in the way of alternatives. So the political climate in Australia is actually a significant factor to economic risk in Australia,” he said.
Helen Westerman is Deputy Managing Editor at The Conversation. Sunanda Creagh is Editor at The Conversation. This article was originally published in The Conversation on 15 April 2015. It is republished with permission.