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It’s very much about China but it’s not all about China

15 April 2024

Intelligent Australians know only too well why they’ll suffer much more financial stress than they’re suffering now if China’s economy worsens.

What they don’t know but would dearly like to know (because a considerable amount of business forecasting and planning depends on it) is whether they should rely on the most recently released economic data from Beijing to give them a useful indication of how China’s economy is likely to affect their immediate future. 

It’s Macks Advisory’s opinion that no, the data China has supplied about its economy should not be relied upon, especially statistics presented by the ruling Communist Party last month to justify the claim that a targeted 5% economic growth this year is achievable.    

Why shouldn’t it be? Because Premier Li Qian admits his country is dealing with “an array of interwoven difficulties” that include the greatest collapse of property investment in the nation’s history, and a declining population.

Furthermore, we note Western analysts’ discoveries of past and on-going discrepancies in Chinese economic data have led them to be sceptical of last year’s posted growth of 5.2%, and therefore of this year’s forecast of about 5%, erroneously based on that.

And New York based Rhodium, a diligent analyser of Chinese economic data for decades, has issued a statement categorically concluding China “vastly overstates” recent growth.

Leading economists in western countries have indicated clearly, they believe bulletins from Beijing on China’s economic growth merely seek to plug a gap between what the ruling Communist Party needs politically, and what can be realistically achieved. Rikka Nuutilainen an economist with the Bank of Finland says that for many years the Chinese have been setting growth targets too high to be achieved organically, and Party officials have been too scared to lower them.

So, what CAN be relied on?

Australia’s economy is bizarrely and barely propped up by two things. One, China’s dangerously volatile demand for our natural resources and two, our country’s out-of-control immigration program that has been delivering 1500 new arrivals a day (weekends included). It’s a surge that has brought massive pressure on housing and infrastructure. It has caused complications with wages and business costs and consequent living costs.

Yet it’s good to see the Chinese, having behaved as though they had no pressing need for our iron ore, coal, and natural gas -- by previously refusing to let an armada of bulk carriers unload – have had a change of heart. Also, that they’ve decided there’s more of a need to remove wine and other devastating tariffs than there’s  need to continue them as punishment for Australia’s agreement with much of the rest of the world that yes, China probably had quite a lot to do with causing the COVID pandemic.

Even so, the net result of all this is Australia’s economy slowed in 2023 to achieve an uninspiring growth of 1.5% for the year, down to a depressing 1% over the final six months. In fact, the economy was in clear and undeniable per capita recession throughout last year.

Furthermore, were it not for trade with China and a more general global demand for our coal and natural gas, our economy would have shrunk by 0.4% in the December quarter and Australia’s per capita GDP would have fallen by nearly 1% -- an annualised drop of close to 4%.

When this article was being written Macks Advisory had not seen a figure for the economy’s GDP growth in the March quarter, but in the December quarter it could have been even worse than the minus 0.4%  reported, were it not for trade with China, a general surge in exports, and an understandable drop in consumer imports (because Australians’ disposal income also dropped in our problematically managed economy).

So, if Chinese economic data is unreliable and what they may or may not do about tariffs in future should we annoy them again is unknown, then what CAN be relied upon? Where should Australian business owners be focused?

The other side of the coin

A growing number of Australia’s business analysts are developing a philosophic attitude to wherever China’s economy may be heading (because they can’t do anything about it anyway). They’re therefore tightening focus on whatever positives are locally to hand that can stimulate growth

 Indeed, they are forecasting that because recent earnings results have been better than expected, because the tone and comment of economists more broadly points towards optimism not seen for several years, it’s widely believed many Australian companies will this year, as confidence grows, increasingly pivot from defensive strategies, towards those for long-term growth and expansion that involve merges, acquisitions and increases in capital investments.

According to Principal Asset Management (PAM), Australian listed infrastructure companies are among some of the world’s most attractive takeover targets because of comparatively little government intervention.

Consequently PAM, which controls more than $960bn in funds globally, expects this will be a strong year for the sector in Australia.  

According to CommSec analysts, it’s the recent performance of Australia’s smaller companies that has been most surprising.  Almost a third of them in All Ordinaries-listed groups have been beating market expectations, 29% show results in line with forecasts, and only 28% are falling short of expectations – compared with 35.5% of ASX 200 companies.

Ticking time bombs

But all are threatened by ticking time bombs in plain sight that too many people tend to ignore.

One is abysmal productivity which has seen our economy’s competitiveness slump in less than a decade from fourth to 19th in the world among developed nations. (We drew attention to this in last month’s newsletter and pointed out pathways to remedies.)

The other time bomb sitting among us, is near double digit escalation of so-called “wages plus” Compensation of  Employees (COE). The cost of attempts to compensate workers for losses in the real worth of wages degraded by inflation, is now running at 8% in the private sector and 9.1% for public servants – the highest for them since 2011 according to the Australian Bureau of Statists (ABS).

The explosive potential of these bombs is a fearsome double blast. The first is fiscal – where governments are forced to raise taxes or cut services or jobs (and in a worst-case scenario, both services and jobs). Secondly, if productivity doesn’t improve, businesses will have to decide whether to raise prices or sack workers.

Conclusion: what will be will be as far as China goes. All you can do about that as an Australian business owner, is maintain a watching brief on anything the Chinese do likely to affect your business. Your prime focus should be on growth prospects within whatever existing and potential flexibility there is in Australia’s economy -- knowing that at least you can do something at the ballot box about its mismanagement.

Disclaimer: The information contained in this webpage is general information and does not constitute legal advice. Nothing in this webpage is or purports to be advice. If you do need advice, then you ought to seek and obtain appropriate personal professional advice based on your personal circumstance.

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