Australia's budget sees global growth accelerating, with China's slowdown offset elsewhere


Australia’s Treasury believes global economic conditions will improve in the years ahead with Australia’s major trading partners “expected to outpace world growth”.

Global economic growth is tipped to grow by 3.5% in 2015 before accelerating to 3.75% in both 2016 and 2017. Growth in Australia’s major trading partners is forecast to expand by 1.5% both this year and next before slowing slightly to 4.25% in 2017.

China, Australia’s largest trading partner, is expected to grow by 6.75% this year before decelerating by 0.25% in both 2016 and 2017.

Here’s treasury on the outlook for the Chinese economy (our emphasis in bold):

“Solid and sustained growth in China will be underpinned by the transition to a pattern of growth that is more reliant on consumption. A broader-based model of growth will enhance the resilience of the Chinese economy as the market plays a more decisive role and institutional settings are reformed. This will also strengthen the economy as it faces long-term challenges, including an ageing population. A key risk, however, is that China’s transition to a more sustainable growth model may not be smooth, presenting changing demand patterns for Australian exports”.

Growth in Japan, Australia’s second largest trade partner, is expected to expand by 1% this year and next before slowing to 0.5% in 2017.

Here’s Treasury’s assessment, again with emphasis added:

“Economic growth in Japan is also expected to strengthen to 1 per cent in both 2015 and 2016. While activity has been weaker than expected following the increase of the consumption tax rate in April 2014, December quarter 2014 GDP suggests that activity has turned the corner. This improved outlook is underpinned by accommodative monetary and fiscal policy settings, coupled with the depreciation of the yen and lower oil prices. Over the medium to longer term Japan continues to face structural challenges and the ongoing success of the ‘Abenomics’ reform package will be critical in boosting growth“.

East Asia, that which includes Hong Kong, South Korea, Singapore and Taiwan, along with the Association of Southeast Asian Nations, is expected to grow by 4.75% in 2015 and 2016 before accelerating to 5% in 2017.

The US, still the world’s largest economy by some margin, is forecast to expand by 3.25% over the next two years before slowing to 3% in 2017 while the Euro area, the largest economic ‘bloc’ globally, is expected to grow at 1.75% out to 2017.

Treasury also forecast that India’s economy is expected to expand at 7.5% over the forecast period. The budget papers say the nation “could become a much more important trading partner for Australia and the region, which is why the Government is prioritising the negotiation of a Comprehensive Economic Cooperation Agreement with India”.

While the assessments offered seem reasonable, they may be seen as optimistic. Concerns about China’s economic rebalancing will persist, as questions over the pathway for growth in the US and Euro area as ultra-easy monetary policy settings are removed in the years ahead.

A faster-than-expected slowdown in China could have severe consequences for the Australian domestic economy. Chris Richardson of Deloitte Access Economics said last month that a “sharper shake-out” in China would lead to a “recession scenario” here. “We’re talking a recession scenario. If China sneezes, Australia will catch pneumonia,” Richardson said.

Given the spate of global growth downgrades seen in recent years, risks are weighted to the downside.

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