Economist warns Australia is ill prepared to handle a China slowdown

A former Treasury official said Australia’s economy is not prepared to deal with another shock. He also forecasted that if China slows considerably, it would fail to avoid a recession.

Chris Richardson, from Deloitte Access Economics, said, the official interest rate is currently at record low by 1.5 percent and dollar is already near its long-term average. He added that compared with Australia’s economic position heading into the global financial crisis, the commonwealth budget is already billions of dollars in deficit.

Household debt is now the second-highest in the world relative to income because house prices are hitting “dangerously dumb” levels. Richardson explained that it would mean spur spending in the future would be far costlier for the government and would be more demanding to push.

In his speech to the National Press Club Wednesday, he discussed the importance of Australian leaders to be aware of such a scenario. The Guardian reports that he is also using his speech to warn that governments and businesses have turned out to be so fearful of the future their conservatism risks making future generations less well off.

In his notes, Richardson stressed that the future should not be something to be scared about, and that preparedness is key. He said it is possible to overcome uncertainty with better information.

Consulting firm Deloitte revealed that a downturn in China would bring a recession in the country costing 500,000 jobs. If the downturn starts this year, it would reach peak effect by the first half of 2019.

The economist has noted that Australia’s dependence on China is greater compared to any other country since alliance with UK weakened in the early 1950s.

The Reserve Bank is expected to respond by cutting rates and through pumping liquidity in the market. However, Deloitte had issue a warning that global financial markets would likely become more loath to back up Australia’s deficits and may push rates higher.

Furthermore, business sales would drop by at least 8 percent and profits by 19 percent but not all sectors would be affected. Industries like construction and mining could suffer while healthcare would not be very much affected by overall demand. A drop in Australian dollar is expected to be a benefit in tourism and some sectors of manufacturing. Based on the analysis from Deloitte, it is likely that output would recover by 2020, but even 15 years later would be 2 percent lower than it would otherwise have been.

Video Source: YouTube/Al Jazeera English