• Clifford Bennett, Chief Economist at ACY


• 19.11.2021 10:30 am
#stocks

The world is fast moving toward a SELL AUSTRALIA feeling...

2022: The Australian dollar can easily fall to 65 cents again. As the 'Sell Australia' theme/meme gathers pace, 58 cents is not a big call for 2023 or sooner.

AUS200: A move back to 6,200 in 2022 is a moderate risk scenario. The market is not looking comfortable above 7,000, and while the US and Europe have been making new highs, the Australian market has been stalling out for some three months now.

The golden egg no more.

Australia's Exports fell 6% in the latest quarterly data. See video I have been running below this story. Finally cracked 1,000 views.

What is interesting about Australia's trade position however, and therefore our long term domestic economic outlook too, is that for every 5% drop in exports to China, we would have to totally double that, increase by 10% our exports to all our other trading partners. In agriculture we can adjust at the margin, but not enough to cover it all. For iron ore, there is zero chance of finding replacement markets. Competitive production is beefing up around the world. Oh, and on the question of beef, a disaster.

As for our political stewardship in all of this? Does complaining to the WTO really help the situation? We were just very aggressive in doing so in the past few weeks but is this not exactly the kind of behaviour by us that has soured the relationship permanently in the first place.

China is more than happy to hear and consider our complaints behind closed doors, but we have completely disrespected their culture by our leaders grand standing at the UN, and openly publicly declaring a coalition first of other Asian nations, and then a step back in time to the UK and USA alliance.

Now, we all want to be patriotic and say how great Australia is and we are completely in the right and China is completely wrong. But, rarely in any argument is such a basic approach a pathway to reconciliation.

Why should we care what they think? Umm, they have kept our economy going in the darkest of global economic environments.

The USA and the UK have been a very big part of our culture and historic diplomacy, but it is China that has been the very best of friends to us economically for the past decade or more. I am not suggesting we are in the wrong. I am suggesting the whole process could have been handled better, and even if we cannot agree on that, there is no escaping that Australia's economic outlook has been permanently, for the next 10-20 years, reset to a lower benchmark.

There are two separate but equally powerful drivers in this regard. Firstly, the souring of our relationship by both parties to a degree that China is openly stating it will reduce iron ore imports by 50% by 2025, and all other sectors as much as it can. It is encouraging students to study elsewhere. Education is Australia's third largest export.

As if all of that is not enough, the second factor is the historic slowing of the Chinese economy now under-way. China is naturally and appropriately slowing down to still impressive rates of economic activity, but nothing of the kind of the previous two decades.

Simultaneously, the best of the party is over, and we are being asked to leave as well.

Over the next 2-3 years we could see our exports to China fall by as much as a third, and this will cripple our GDP growth trajectory.

We can debate the philosophy and the geo-politics until the cows come home, but decades of work by former Prime Ministers and Australian governments in cultivating a friendly and economically beneficial relationship with China, has been unravelled in just two years.

My point of today's article is not to argue who is right on any particular point, just that our handling of the situation has been a very public in your face stance that goes against every fibre of Chinese culture. not just of the political leadership but of the Chinese consumer too.

The ultimate point I am of course making is that there is no escaping the economic price to be paid.

We should not delude ourselves on this point, and we should prepare our business plans and investment plans with an awareness that there will be unsettled weather ahead for the Australian economy as a result.

Coming at a time of an already over-heated property market courtesy the RBA, and the bringing forward of economic activity into the previous year by government stimulus measures, the Australian economy is about to be hit by a deterioration in both the external and internal demand aspects of our economy.

2022 will be celebrated by Australians as a new beginning. While under our feet the economy is being quietly eaten away by RBA encouraged inflation and an unfortunate loss of friendship with our biggest trading partner.

When I spoke on 'Future China Trade Patterns' at the Caxin Summit in Beijing, I walked to the stage alongside the man who had brought China into the World Trade Organisation as their Chief Negotiator, Long Yongtu. A national hero of course. Referring to the GFC and what had unfolded, I said to him, "I recently wrote a paper, "Big C saves little c", China saves Capitalism. He smiled.

But nothing it seems, will save our trade outlook.

Hence, the growing realisation in the global investment community, that though they may like us, we are probably a "sell" just the same.

Clifford Bennett