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China helps fuel Australian economic recovery despite trade feud

Hunger for iron ore offsets Beijing's clampdown on other commodities for now

A worker prepares imported iron ore for transport at a port in China's Jiangsu Province in 2019.   © Reuters

SYDNEY -- Australia has pulled itself out of its first recession in three decades thanks to its success against COVID-19, and China's appetite for resources looks likely to keep the economy humming despite the two countries' worsening tensions.

The Australian economy surpassed all expectations to post 3.3% growth last quarter, according to data released on Wednesday, while the country's central bank expects a "solidly positive" performance in the current quarter.

Overall export volumes to China have stayed relatively strong even as the Asian giant slaps penalties on a host of Australian products, amid an ongoing war of words between the governments. Analysts expect demand for Australia's top export earner -- iron ore -- as well as some food and dairy products to remain sturdy in the months ahead.

"Demand for iron ore should help offset trade risks for other commodities," Citi economist Faraz Syed wrote in a note to clients, estimating a 10% drop in China-bound exports excluding the crucial steelmaking material. "We don't expect any restrictions on iron ore because 50% of Chinese iron ore demand needs to be met by Australia."

China's real estate and infrastructure sectors are booming as the world's second-largest economy also recovers from the pandemic-induced downturn. "Given the strong demand for iron ore, there's potential that total merchandise trade to China could be largely unchanged over the coming year," Syed added.

Annual trade between the two countries is worth more than 250 billion Australian dollars ($185 billion), of which roughly 60% is made up of Australia's top three exports -- iron ore, coal and liquefied natural gas.

China has unofficially banned Australian coal, leaving numerous shipments in limbo, though Bloomberg reported on Thursday that some of the fuel may be allowed in. Agricultural exports, meanwhile, have borne the brunt of Chinese anger since Australian Prime Minister Scott Morrison called for an investigation into the origins of COVID-19 earlier this year.

China has lashed out against Australian cotton, barley, beef, lobster, timber and most recently wine. But agricultural exports make up just 0.02% of the island nation's annual output.

By comparison, iron ore exports, which account for 7.5% of gross domestic product, have picked up lately. The Australian Bureau of Statistics late last month announced that iron ore exports hit a record high of AU$10.9 billion in October. Branko Vitas, ABS head of international statistics, credited a 6% monthly jump in overall exports mainly to "metalliferous ores, most of which was iron ore headed for our largest trading partner, China."

China would be loath to attack the material, as any cutback would result in prices rising further, hurting its own economy.

BIS Oxford Economics analyst Rory Treadwell said he expects Australia's trade balance to stay comfortably in surplus through 2021. "Despite current pressures on some goods exports, we expect demand for mining exports will stay relatively well-insulated through the ongoing industrial recovery in China," he said.

The risk of the spat widening to other non-mineral portions of the trading relationship remains real, however, and is weighing heavily on the minds of policymakers.

Treasurer Josh Frydenberg this week called the situation "very serious," saying many Australian jobs rely on trade between the two countries.

Unemployment in Australia has risen above 7% since March, from pre-pandemic levels of around 5%. Official forecasts indicate the figure will remain elevated for at least a couple of years, a major reason why the Reserve Bank of Australia has pledged to keep cash rates at a record low 0.1% for at least another three years.

Australia faces other headwinds over the medium term, including a gradual paring back of government stimulus measures by March 2021. Closed international borders mean the immigration-fueled sectors of tourism, education, retail, hospitality, real estate and construction could see slowdowns.

Nevertheless, the near-term outlook appears solid, with expectations that Australia's annual economic output could return to its pre-COVID pace as soon as early next year.

A strong GDP outcome in the final quarter of 2020 would put Australia on a different trajectory than its rich world peers, many of which have been forced back into virus lockdowns. Australia has stood out among developed countries in dealing with the pandemic, limiting infections to about 28,000 and deaths to around 900.

Shoppers in Melbourne after coronavirus restrictions were eased in October: Consumer spending indicators were strong through November.   © Reuters

The economic rebound in the September quarter was led by a record 7.9% surge in household spending, which accounts for a lion's share of the economic output. Direct fiscal support estimated at nearly 11% of GDP -- mainly in the form of a wage subsidy scheme and tax cuts -- has so far boosted consumer and business confidence.

The latest card spending data from the country's major banks underlines the optimism, showing consumers splurged in November during Black Friday and Cyber Monday sales. The biggest lender, Commonwealth Bank, reported a 12% jump from a year ago in weekly card spending in November. Westpac recorded the highest level of spending in a year, while smaller rival ANZ saw a 28% surge.

"Far from being under pressure, households have been left flush with cash and keen to spend," said David Bassanese, chief economist at exchange traded funds provider BetaShares.

"It was a slump in consumer spending that drove us into recession and it's been a sharp rebound in spending that has led the way out."

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