China’s painful economic transition is continuing.
Growth has slowed and the impact of stimulus, both monetary and fiscal, appears to be fading. That’s both in outright terms and in terms of the credit multiplier – the amount of debt the country needs to generate for every dollar of economic output.
It’s one of the reasons the market has been so focused on the weakening Chinese economy and the central bank and government’s efforts to slow the rate of economic weakness.
But, according to Chris Nicol, Daniel Blake, Steven Ye, and Anthony Conte from Morgan Stanley’s Australian Macro team, if the market is worried about China’s “debt efficiency” then Australia’s problems are even worse.
“While the market seems concerned about China’s need for over $6 of debt to create $1 of GDP, we highlight that Australia is currently using $9 for that same dollar of growth,” Nicol and his colleagues say.
They say that this is a “simplistic” measure of debt productivity, or debt efficiency, but it does show “how much nonfinancial debt has increased relative to the growth in nominal GDP over the same period”.
Morgan Stanley also says the comparison is a little unfair on Australia given where it is in the cycle of recovery from the end of the mining boom and terms of trade.
“But weak nominal GDP is also a function of disinflation right across the non-mining Australian economy, and indeed throughout the region.
“Australia needs to find growth drivers that are less debt-intensive, otherwise leverage ratios will increase further, as will the risk and consequence of any future shock/crisis.”
As a result, Australia needs structural reform, the analysts say, because “key distortions remain in place, especially on the relative tax treatment across savings choices that penalises savings in cash/fixed income and encourages leveraged property investment”.
Not many would disagree with Nicol and his colleagues when they say: “We believe more needs to be done to secure Australia’s long-term future.”