2019 — Australian exports resilient amid global slowdown

Global economic growth slowed in 2019 as rising trade and geopolitical tensions hurt exports and business investment across emerging and developed markets. Disruptive global and domestic politics, alongside growing economic and social discontent, exacerbated the slowdown in several economies. The IMF lowered projections throughout the year, and in its latest World Economic Outlook estimated global growth of 3% for 2019, its lowest level since 2008-09.

Against the backdrop of slow growth and low inflation, many central banks loosened monetary policy. That eased financing conditions for sovereigns, corporates and households and boosted global equity markets. Tax cuts and higher government spending also provided support in some countries. Notwithstanding this, sovereign creditworthiness remained broadly intact; S&P report positive sovereign credit rating actions outnumbered negative actions over the year to September 2019.

Australian exports withstood the difficult global environment—broadly grouped into three themes below.

1. Escalating trade and geopolitical tensions

The US-China trade dispute dominated reporting on global economic developments. The ratcheting up of US and Chinese tariffs on imports from one another, and ongoing policy uncertainty, contributed to the slowest growth in world exports since the slump in 2009 (Chart 1). Electronics producers integrated in global supply chains, including Thailand and Singapore, suffered heavily. Conversely, the shift in US import demand away from China has benefitted countries such as Taiwan, Mexico, the European Union and Vietnam, according to a recent United Nations report. Recent developments indicate a willingness on both sides to reach an initial trade agreement that will see China purchase more US agricultural products and the US roll back some tariffs. However, a deal is not yet been signed; and even if it is signed, it does not resolve structural trade issues between the two countries.

Rising global protectionism has become pervasive and entrenched, and the WTO’s dispute resolution system ineffective. Trade frictions have spread beyond the US-China dispute. Japan has placed restrictions on the export to South Korea of chemicals and a range of Japanese made goods. More recently, the United States announced tariffs on Brazilian and Argentinian steel and aluminium and French cheese and champagne. The United States has also not ruled out new sanctions on Russia. Moreover, Brexit-related uncertainty weighed on the UK economy and trade with Europe and across global supply chains.

2. Rising economic and social discontent

Growing economic and social discontent manifested in several countries, creating additional economic and fiscal challenges. Mass protests in Chile prompted the government to take measures to reduce income inequality and re-draft the constitution to codify a new social pact (Chart 2). Economic and political factors sparked protests in Iraq and Lebanon, leading to the resignation of respective Prime Ministers and increased economic uncertainty. Protests in Iran, triggered by the Iranian Government’s fiscal response to US sanctions, have been contained. Concerns about a loss of democratic rights and freedoms continue to spur protests in Hong Kong and have pushed the economy into recession. Protests continue to disrupt some copper mines in Peru.

Political tensions have hindered the effectiveness of policymaking institutions. A narrow victory for President Erdogan’s party in Turkey led to a new wave of fiscal stimulus that raised the risk of a balance of payments crisis and led to credit rating downgrades. A new government in Sri Lanka proposed large tax cuts, exacerbating risks to debt sustainability and violating its IMF program. A poor result by President Mauricio Macri in electoral primaries in August led to a rapid outflow of capital and major devaluation of the Argentine peso against the USD. The introduction of emergency currency controls reduced volatility, but economic stability remains fragile. Newly elected president, Alberto Fernandez, has indicated his government will seek to restructure Argentina’s debt as an early priority.

3. Growing debt vulnerabilities

Many central banks lowered interest rates in 2019 to shore up growth. The availability of cheap credit and increased fiscal spending has increased debt vulnerabilities. The IIF indicate global debt exceeded US$250 trillion in the second quarter of 2019, equal to about 380% of global GDP. Emerging market debt topped US$71 trillion, reaching a fresh-record high of 220% of emerging market GDP.

An increased reliance on external market borrowing raised vulnerabilities in heavily-indebted poor countries (Chart 3). Corporate sector vulnerabilities also rose in several economies amid growing debt, slowing economies and weakening revenues and profits. In particular, higher corporate bond defaults in China heightened financial stability risks. Household debt remains high in developed markets, weighing on consumer confidence in Australia, Norway, Switzerland and Denmark.


Exports resilient thanks to increasing Chinese resource demand and higher prices

Notwithstanding external and domestic challenges, Australia’s exports performed well in 2019 (Chart 4). Goods and services exports have been growing at, or around, double-digit annual rates since April 2018.

Resource and energy exports remained key, and helped Australia post a rare current account surplus. Record numbers of Indian visitors bolstered tourism, while more international students boosted education. Services exports rose 9.4% on an annual basis over the year to October 2019.

China remained the most important source of demand. Robust steel production and supply challenges due to Brazil’s dam disaster have supported demand for Australian iron ore. Growing energy requirements and China’s long term policies to improve environmental outcomes have boosted demand for Australia’s LNG. Despite more challenging overall economic conditions, solid domestic consumption, as evidenced by the recent record Singles Day sales, continues to benefit consumer-oriented exporters. Chinese demand for frozen beef exports also rose as consumers substituted pork for other protein sources amid the swine flu epidemic.

Business conditions in other major export markets also broadly improved. Election victories for incumbent leaders in Indonesia, India and South Africa reinforced efforts to reduce corruption and make it easier to do business. A lower Australian dollar (down 8% through 2019 to around US68 cents) also boosted export competitiveness.

On the negative side, drought weighed on agricultural production. Weaker Korean growth hit demand for meat and wheat. Exporters also had to navigate slowing euro zone economies, the prospect of future tariff cuts in Brazil and coal sector reforms in Indonesia that challenged demand for Australian goods.