Australia Q1 GDP Preview: China, retail sales, employment and China

The Australian Bureau of Statistics will issue its estimate for first quarter GDP at 11:30 am AEST and 1:30 GMT Tuesday June 5th, 21:30 EDT June 4th. 

Forecast

First quarter gross domestic product is expected to expand 0.4% on the quarter from 0.2% in the final three months of 2018.  The economy is predicted to grow 1.7% over the prior 12 months down from 2.3% in the last quarter of 2018. 

Record expansion not yet under threat

Australia is famous for having the longest expansion in the modern industrial world. Its economy has not charted two straight quarters of economic contraction since the first half of 1991.

While that record is not yet in jeopardy the economy is entering a period of unusual uncertainty.

With the US-China trade dispute hanging over growth prospects, housing prices falling and the bloom off the commodity markets the Australian economy is without a large scale engine.  The longer the trade argument drags on the greater the potential damage to US and Chinese expansion and by default Australia. 

Despite the bluster from both Washington and Beijing it is probably China that has more to risk from an extended trade war. 

American consumers would, over the long run pay somewhat more for a wide range of consumer goods and the reciprocal tariff barriers would shave a few tenths of a point from US GDP. But the US economy is not dependent on exports for growth. The Chinese economy is. Over time the curtailment of trade and manufacturing would affect the jobs of millions of workers on the mainland.  For the US it is a matter of consumer pricing, for China it is a matter of consumer livelihood.

Xi Jinping at the head of an authoritarian system is under little threat of losing his job to domestic discontent but Beijing nonetheless fears the anger that widespread unemployment might bring.

This year is the 30^th anniversary of the violent government destruction of the Tiananmen Democracy Movement. Though the government has erased almost all mention of the repression there are millions of Chinese who remember.

Donald Trump is taking the larger political risk even though the US economy is relatively insulated from large scale dislocation from trade. A recession, even a mild one, extending into 2020, an election year, could defeat him at the ballot box.

A slowdown in China

A serious decline in Chinese growth would have a dramatic impact on the Australian economy its primary supplier of raw materials.  

Mainland economic expansion year over year was 6.4% in the first quarter. That is the lowest growth in the modern post-Deng era. It equals the bottom of the financial crisis plunge.  It is also a new development. 

Reuters

Rapid GDP growth is the sine qua non of China’s economic and political life. It is the premier achievement of the Communist regime and the proof of its success and its right to rule.  A slowdown in GDP that excited labor unrest is far more dangerous to Beijing than the election of a different president in 2020 is to Washington.

Australian statistics

Australian unemployment has already started to rise moving from 4.9%, its post-recession low in February to 5.2% in April.

Reuters

Business inventories rose unexpectedly in the first quarter which should help to underpin growth. The reason for the 0.7% stockpiling was weaker retail demand which constitutes about 30% of household consumption.

Retails sales declined 0.1% in April missing the 0.2% forecast and well below the 0.3% gain in March.

Exports are another recent weak point for the Australian economy. Current account exports of goods and services were down 2% in March following a flat February and a 5% rise in January.

Business conditions and confidence have fallen significantly since the third quarter of last year.

National Australia Bank’s business conditions index registered 3 in April equaling the lows of the past four years and a steep decline from 15 last September.  Business confidence has also taken a header over the past year, rising slightly to flat in April from -1 in March but down from 7 in July 2018.

Reuters

Conclusion

The warning signs for the Australian economy are evident for businesses and consumers. The providential connection to China that has served the Lucky Country famously over the generation of China’s rise to economic power means that her destiny is not wholly her own.

If China concludes her trade warfare with the United States in an agreement that maintains growth and access to the global trading system and US markets, Australia will have a few more years to lengthen its recession record.  If not its luck may have finally run out.