Analysis: Fading China Stimulus Post-Trade Deal Risk for Australia Exports, RBA Policy
- Published on
- 17 Jan 2020, 02:50 PM
By Sophia Rodrigues
The signing of phase one of US-China trade deal marks a de-escalatation in their two-year long trade dispute but it is unclear if this will lead to a reduction in uncertainty and encourage business investment. As long as the uncertainty continues, the net impact of the trade deal is a negative for Australia’s exports and thus poses downside risk to the Reserve Bank of Australia’s monetary policy.
There are two main risks for Australia’s exports:
- China is likely increase its imports from the U.S. to meet the terms of the deal by cutting its imports from Australia. This is likely to hurt Australia’s LNG and agriculture exports.
- The stimulus to China’s economy from the trade deal means it can reduce targeted fiscal and monetary policy measures to support local demand. This would have an impact on Australia’s iron ore exports.
When the US-China trade dispute began two years ago, the RBA was at the forefront in voicing concerns about its impact on Australia, and on global growth. Initially the concerns were all about “protectionism” but later it was referred to as “trade tensions” and more recently, “trade and technology dispute.”
The softening in the terminology was likely a reflection of RBA’s acknowledgement that the impact of US-China trade dispute on Australia wasn’t as bad as they initially feared. On the contrary, it has been beneficial to Australia because China took measures to stimulate domestic demand.
In the November Statement of Monetary Policy, the RBA noted that China’s policy measures have been tilted towards steel-intensive activities, including public infrastructure projects.
“This has supported Chinese steel production and, in turn, demand for Australian bulk commodities, even as Chinese growth more broadly has slowed. This has been positive for iron ore prices and, together with the effects of past supply disruptions, has resulted in Australia’s terms of trade holding up a little higher than earlier expected.”
This positive impact on Australia’s exports has supported the economy in the past year, pushing trade surplus to record highs as exports surged. It is one of the reasons behind the economy reaching a gentle turning point. It is also one of the reasons why the RBA is confident that growth would accelerate this year and the next.
Year-ended growth is forecast to increase to 2.75 per cent over 2020 and around 3 per cent over 2021, supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector,” the RBA said in November.
The impact on Australia’s exports notwithstanding, the RBA has always considered a resolution in the US-China trade dispute to be an important positive for the local economy.
This is because the trade dispute has generated significant uncertainty for businesses around the world, and this has hurt their investment plans. It has also led to volatility in financial markets and more monetary policy easing by global central banks. The RBA has had to react to such easing by reducing its cash rate so it can contain risk of appreciation in the Australian dollar.
The signing of phase one of the trade deal means the risk of escalation has been eliminated. That is a positive. But many worry that things could re-escalate later this year. As long as such worry remains, businesses are unlikely to make big spending decisions.
For the RBA this means, the narrative that risks to global growth is mostly to the downside will remain when it next drafts its Statement of Monetary Policy in early February. But this time, that narrative will also be accompanied by a downgrade to terms of trade outlook which would be in addition to continued uncertainty on household consumption front.
This, and other factors, could push RBA to a cut in February, or in the least, lead to more strengthening in the easing bias.
--Contact: sophia@centralbankintel.com