By Chris Zappone
Australia's economy looks well placed to weather the worst of a US-triggered global slowdown as it has increasingly decoupled from the American one.
While the US economy hovers near a recession and systemic problems in its banking system are likely to saddle its debt-burdened consumers for years to come, Australia's resources industry has stayed strong, propelled by China's demand for commodities. The major Australian banks have - so far - escaped the credit crunch with little damage, as well.
Australia's economy may be slowing, with its annual GDP growth expected to drop to 2.2% in the September quarter from 2.7% GDP growth in the June quarter, according to forecasts by BNP Paribas.
But that's still double the 1.1% September quarter GDP growth expected in the US, to be followed by four quarters of growth averaging 1.3%.
"In the next month or so we're going to see if the decoupling theory holds," says ANZ economist Mark Pervan. "With the US on its knees history would say we're not far behind."
The possibility of Chinese commodities demand shielding Australia from a US-spurred global slowdown means the old truism about the world catching a cold when the US economy sneezes has to be revised, Pervan says. "Now it's when the US gets a cold, we sneeze."
RBA moves anticyclical to Fed's
"I have my doubts that the Australian economy will ever be completely decoupled from the US economy," says BNP Paribas economist Alan Clarke. "However, there is evidence to suggest that a fair degree of decoupling has already happened. "
The RBA minutes and monetary policy statements over the past year have shown an evolution in the central bank's thinking, he says. "The biggest swing factors that has influenced the board's outlook has been developments in Asia. This has arguably been more influential than developments in the US. "
The RBA's continued lifting of interest rates through the first year of the credit crunch contrasts with the US Federal Reserve's and other central banks' rate cutting, Clarke says. And now that the RBA has cut rates, the Fed looks more likely to begin raising them.
"One key characteristic that sets the Australian economy apart from the US (or the UK for that matter) is the consumer," he says.
"In the US, consumers have been spending way beyond their means, spending in excess of take home pay by borrowing against housing wealth. This is the root cause of the current financial turmoil. By contrast, Australian consumption growth has been slower than take home pay growth and reliance on mortgage equity extraction has been shrinking."
"Essentially that says more about the structure of the domestic economies. Ultimately, since Australian growth does hinge to an extent on Asia and in turn Asian demand (with some delay) depends on global and hence US growth, there are always going to be linkages between Australia and the US. However, those linkages are becoming increasingly blurred with time."
Linked to China
If China's domestic economy is going well enough that it doesn't rely on exports to the US, then the decoupling story could come back to life, says Michael Turner of economic forecasting group 4Cast Ltd.
In that case Australia would fare better than many non-resource centred economies, he said.
China's year-on-year gross domestic product growth is forecast to edge down to 9.5% in the September quarter from 10.1% in the June quarter, showing only a modest weakening from its double-digit growth.
"You'd imagine China's economy is fairly well insulated from the banking failure we're seeing right now."
"If (decoupling) was going to happen you'd daresay this would be the time. But it remains to be seen," says Turner, giving a six-to-12 month time frame for it to become apparent.
"Even if the US were to grind to a halt and go into a recession, the demand out of China is strong enough to support export growth in Australia," he says, although he doubts China's GDP growth will remain at the levels seen over the past 18 months. China's GDP hit 11.9% for 2007.
czappone@fairfax.com.au
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