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Economy

Trade wars have been beneficial to Australia economy

The trade wars have actually been beneficial to Australia’s economy, while falling house prices and drought have been bigger issues, Deloitte Access Economics Partner, Chris Richardson has told CEDA’s State of the Nation Conference.

Providing an Australian economic update, Mr Richardson said, “It turns out that the world's largest beneficiary of the trade wars to date has been Australia.”

He said the main way Australia is usually hurt is through commodity prices.

“What Australia does very differently to essentially any other rich nation around the world is we sell industrial inputs to the world's factories,” he said.

“In a downturn those factories get hit the hardest and the prices of…the coal, the iron ore and the rest of it usually goes down and goes down quite a lot, that's how we hurt.

“That has not been happening, the main reason, and it's been building slowly like the improvement in the (Federal) budget balance and for the same reason, since the early months of 2016, is as China has slowed it has responded with stimulus.

“Most of this stimulus in China travels through the construction sector, construction needs steel and steel needs coal and iron ore.”

Added to that, he said there had been tragedies in Brazil around mine safety and the response was to close production down, which had resulted in big increases in coal and iron ore prices.

He said gold prices, while still off their peak, were also up.

Mr Richardson said two-thirds of the problem for Australia was actually housing.

“There are lots of things to worry about and I certainly wouldn't pretend otherwise but you do the stocktake as of today and Australia's easily, easily been the world's biggest winner from those trade wars and much of what we're thinking about as the problem is genuinely not the problem,” he said.

“Which does of course raise the question of what has been doing the damage.

“From about late October onwards house price falls in Australia accelerated. There was a substantial phase where the average home in both Sydney and Melbourne was losing value by $2000 a week.

“I don’t really want to call it a bubble, but it was certainly close to a bubble.

“It was always going to bite Australia on the bum as you know, because those prices divorced a long way from fundamentals, from gravity if you like and gravity eventually caught up with that stupidity.

“The housing downturn…made consumers more cautious, rather wealth was going down and they were more cautious… that has been what's been causing the damage here in Australia.

 “Housing construction is around five per cent of the Australian economy; retail spending is 25 per cent and more widely consumer spending is over half the Australian economy and as the wealth of consumers began to go down there was a lot of fear around that, you saw consumers become more careful…pull back on spending and as always it was the discretionary stuff.

“So car sales are down 10 per cent today on where they were a year ago. Discretionary spending is where that pain was felt.”

He said house prices are rebounding and that may be a problem longer-term but in the short term it is putting a floor under the Australian economy.

Speaking on countering a slowing economy, he said to improve wage growth and reduce the unemployment rate, the domestic economy would need unemployment to fall from five and a quarter to four and a half per cent, and an extra 200,000 jobs created.

“Essentially for the first time ever interest rates are getting cut for two reasons, not because economies are slower, but the thing people really don't understand is growth is showing up here and around the world differently to how it used,” he said.

“These days it shows up more in jobs and less in wages. The trade-off between unemployment, and hence wages and prices, inflation, that trade-off has shifted.

“The Reserve Bank put up its hand and said well hang on you know we used to think it took an unemployment rate of five per cent to get wages moving faster, now we think four and a half per cent.

“So how much do you need to move the levers to get an extra 200,000 jobs in Australia?

“One of them is interest rates and the other is just infrastructure spending.

“If you were just using interest rates to create an extra 200,000 jobs you would need to cut interest rates by about three percentage points which is a problem if the cash rate today is one per cent.

“If the only lever we were using to get that extra 200,000 jobs was infrastructure, you would have to essentially triple the amount of infrastructure, public and publicly funded infrastructure in Australia today.”

He said it was essentially an insurance discussion we needed to have on what should be done.

“There are clear gains if you shift policy to get an extra 200,000 people in jobs and wages moving faster, but the risks are you lose wriggle room,” he said.

“Nobody knows the future, and the risks and uncertainty…they continue to rise, you worry about Brexit, you worry about trade wars, you worry about Hong Kong, you should worry more about India and Pakistan; Iran is backed into a corner and its punches are starting to be a little on the wild side.

“If you think is this the right thing to do (policy stimulus), and so many people assume yes, I would simply say role forward five years when we will know.

“If we're looking back and we say well okay we did what the Reserve Bank suggested and we got all those good things, that we've got the extra 200,000 jobs, we got wages moving faster and there wasn't a crisis in the meantime, well it will have been the right thing to do.”

However, he said it was an issue of risk management, because if the world does throw a recession at Australia across that five years, we will have cashed in a chunk of our recession insurance.

“I’m not uncomfortable with where policy is at the moment,” however he said how much we keep in reserve is a complicated decision, and that’s the debate Australia should be having at the moment.