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RBA's Debelle Warns World at Risk of ‘Self-Fulfilling Downturn’

Michael Heath

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The Reserve Bank of Australia’s No. 2 official said global firms’ are unlikely to maintain their strong hiring while they stall investment amid the U.S.-China confrontation, pushing the world into an avoidable slump.

Deputy Governor Guy Debelle also warned that while Australia is currently benefiting from Beijing’s domestic stimulus, it too will eventually suffer from the trade war fallout.

“In the end, the decision to build or not build that new factory needs to be taken,” Debelle said in the text of a speech in Sydney Thursday. “The longer businesses hold off, the weaker demand will be, which will further confirm the decision to wait. That runs the risk of a self-fulfilling downturn.”

Debelle’s warning followed another round of bad news highlighting the risks to the global economy, including weak industrial data from China and slumping exports in Germany. Markets were rattled as the 10-year U.S. Treasury yield dipped below the two-year yield -- considered a harbinger of a U.S. economic recession beginning in the next 18 months.

“The yield going inverted, I’m not sure how much of a signal that is at the moment,” Debelle said in a Q&A session following the speech. “At the moment the U.S. economy is actually growing above trend so they’ve got a fair way to slow from here,” he said, adding that the trade dispute with China nevertheless remains a key risk for the U.S.

Australia Windfall

Australia is often viewed as an economic appendage of China. But it’s exposed to domestic demand rather than the export sector and as a result has actually benefited from the tit-for-tat protectionism. Debelle estimates the stimulus China has deployed to counter the impact of U.S. tariffs is equivalent to its 2015 fiscal injection and has been directed at steel-intensive sectors of the nation’s economy.

This, together with a supply shock, has brought a windfall for Australia, resulting in the terms of trade returning to 2013 levels, and further boosted by the weakening of the local dollar. As to how that filters through to the economy Down Under, he noted about three-quarters of profits from iron-ore prices accrue to foreign shareholders.

“Some flows to domestic households through direct and indirect share ownership,” he said. “Public sector revenue will also receive a boost, mainly through higher tax receipts and mining royalties. It is unclear what the governments will do with this unexpected revenue.”

However, Debelle warned that a significant slowdown in the Chinese economy and weaker household incomes there could come to hurt Australian tourism and education exports.

“To date, the Australian economy has been largely shielded from the effect of the trade disputes,” said Debelle. “But Australia has been a major beneficiary from the rules-based global trading system over many decades. The current threats to that are clearly a major risk for the Australian outlook over a longer horizon.”

Some Optimism

Debelle’s speech, which focused on risks to the outlook, also highlighted Australia’s weak consumption, a key economic metric given it accounts for about 60% of GDP. While a slowdown in the nation’s strong hiring growth of the past couple of years could further drag on household spending, he noted the outlook in general is a bit more optimistic thanks to a recovering property market, as well as lower interest rates and tax cuts.

“Household disposable income growth is likely to be higher because of the direct effect of the tax offset payments to low and middle income households,” he said. “It is uncertain how much of that they will spend or save, or use to pay down their mortgage. Based on past experience, we are assuming they will spend around half of it.”

The RBA cut its cash rate to 1% in July and money markets are predicting further easing ahead.

(Updates with Q&A comment in 5th paragraph.)

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke, Peter Vercoe

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