By Colin Brinsden, AAP Economics Correspondent
(Australian Associated Press)
As Treasurer Scott Morrison puts together his May 9 budget, a prominent Australian economist has issued a simple message: “We’ve messed up”.
Chris Richardson, an economist at Deloitte Access Economics, and self-diagnosed “budget tragic”, says governments thought the China boom would last forever and spent accordingly.
And this comes at a time when Australia’s economy is about to chalk up 26 years of continuous economic expansion, claiming the world record from the Netherlands.
“The most prosperous generation we have ever seen is running deficits after deficits after deficits … that is not good enough,” Mr Richardson told the National Press Club in Canberra on Wednesday.
This has left Australia vulnerable to external shocks, such as a downturn in China.
Mr Richardson released a new analysis describing three possible scenarios facing Australia – an economic stumble in China, the benefits of a stronger Asia beyond China and becoming “cyber savvy”.
However, the latter two require governments to undertake much-needed reform, something the present politics is failing to allow.
“A big part of the reason for what we are doing here … is actually to convince Canberra and politicians across Australia more generally to act now while times are good,” Mr Richardson said.
He hopes it doesn’t take the doomsday scenario of China in decline to activate politicians, although history suggests Australia responds better during a recession.
Prime Minister Malcolm Turnbull said if China experienced a big economic setback, the whole world would suffer.
“China is such a huge part of the global economy now, the impact of a really serious turndown in China would be large,” he told reporters in Mumbai.
But he saw no reason to forecast that, saying the transition to a broader-based economy driven more by consumer demand was so far going smoothly.
“Economists can paint scenarios but … standing here today, I would not be forecasting a big slowdown in the Chinese economy,” he said.
While Australia’s defences would swing into action should China stumble – the Australian dollar would fall, the Reserve Bank would cut interest rates and the federal government would start stimulus spending – Mr Richardson says it still wouldn’t prevent a recession.
“We just don’t have enough ammo to fight it off anymore, ” he said.
That’s because since the last time there was a threat of a recession during the 2008-2009 global financial crisis, interest rates are already lower and can’t be cut much further, the dollar too is lower and the federal budget is notably in the red, meaning the government would be more cautious in stimulus spending.
“Most importantly, Australian families have borrowed up a storm since the GFC, while housing prices are now dangerously dumb.”
While he isn’t forecasting a China crisis, it’s entirely plausible at a time of high trade tensions between Australia, its biggest trading partner and its biggest ally in the US.
There would be winners in such troubled times – a lower dollar would help farmers and some manufacturers, particularly brewers.
“Australians drink more in recessions,” Mr Richardson says.
But house prices would fall nine per cent and the share market would drop 17 per cent, wiping almost a trillion dollars off the nation’s wealth.
“If China did stumble, then the hit to the Australian economy would strip out $40 billion from the budget bottom line in 2019/20 alone,” he warns.