Here’s an interesting one from Chris Richardson: as China’s growth falls, it ensures Australia’s growth.
Now you might be scratching your head while reading that.
‘[Australia’s] main risk is a continuing slowdown in China but at the same time, the more that happens, the more China stimulates the economy,’ the Deloitte partner said.
How does a falling China lift Australia up? They are our largest trading partner. They buy a ton of stuff from down under…
If growth falters, meaning businesses are producing and likely earning less, why would they buy more from Aussies?
Well, it might be because of what China could do to curb low growth…
What China could do to curb low growth
The further China falls, according to Richardson, the more construction stimulus they’ll unleash, helping our iron ore and coal producers.
From the Australian Financial Review (AFR):
‘He called it a short term “insurance policy” for Australian growth but it came with the warning that “a reliance on Chinese stimulus as a fundamental building block of [commodity] price strength is a temporary positive at best”.
‘A growth slowdown was not confined to China, according to Mr Richardson, who forecast global growth peaked in 2018 in the Deloitte quarterly Business Outlook report.
‘Mr Richardson forecast Chinese real GDP growth would fall 0.9 per cent from 2018 to 2023. Industrial production growth was forecast to fall 1.5 per cent over the same period.
‘He was unconcerned a slowdown in global growth would impact this year’s federal budget, thanks to the Chinese stimulus propping up coal and iron ore prices which the budget is sensitive to.’
Remember, this is an educated guess. It’s likely to happen. But it might not happen.
But let’s say ore purchases do pick up. It might temporarily help Aussie businesses. But it won’t help the workers.
I expect you’ll see the mines, rail networks and ports turn more workers away soon.
One of our big miners, Rio Tinto Ltd [ASX:RIO] recently spent $940 million on a driverless train network.
The idea is to get resources from mine to port as efficiently as possible.
What’s going to happen to the rail workers when you’ve got trains running on autopilot? Sooner or later Rio will cut the deadweight.
It won’t happen this year, Rio said. But fast forward to 2020 or 2022. Maybe those efficiency gains come into full swing then. They’ll cut their work force to reduce costs and those workers will need to reskill and find another job.
And in fact, this is the hot topic Morrison is currently pushing. Again, from the AFR:
‘Scott Morrison will pledge the creation of 1.25 million new jobs over the next five years and the eradication of net debt within a decade, a move that would require paying down more than $350 billion over the 10 years.’
Yet clearly those jobs won’t be in factories and the manufacturing sector. Just recently, Ford said they will be cutting 205 jobs and sending them over to the US.
These jobs will need to come from the service sector. And this is where Australia has to focus their efforts in the next decade.
We’re moving towards a local world
Do we know why China is slowing? Anyone?
It’s because they’ve set up their economy to rely on international demand. Domestic demand is not enough to buy all the cheap goods Chinese factories produce.
So, it’s up to the American buyers to pick up the slack.
It shouldn’t come as a surprise that Japan and Germany have the same illness. Growth is either receding or terrible. And it’s because both are manufacture-led, relying on international demand.
The problem with this is the finite demand for manufactured goods.
Each year manufacturers get more efficient. And those gains outstrip the global demand for manufactured goods.
For these economies to turn things around, long-term, they’ve got to look at services. They’ve got to lift their workers out of factories and into offices.
The same goes for us.
If we want to rely on more than iron ore and coal, we’ve got to look at service businesses. Most service businesses are local and grow within local communities.
This internal-led growth gives an economy some protection against macro shocks. This means a global shock is not as damaging to service businesses as it is to producers.
That’s because you don’t care if US businesses aren’t purchasing as much or that US interest rates shot up to 10%.
You’re still going to drop off your dry cleaning tomorrow, see your accountant at tax time and meet with your local lawyers for estate planning.
We’re moving towards a local world. Make sure your investments reflect that move.
Editor, Money Morning
China’s New Boom: How three Aussie investments could be set to soar into 2018 and beyond, thanks to these international trendsetters. Get your free report.