If China stumbles, we fall ... by a trillion dollars
AUSTRALIA would lose half a million jobs, house prices would fall 9% and the nation would lose a trillion dollars of wealth in just two years' time if China "stumbled”, a leading economist says.
Deloitte Access Economics' Chris Richardson has delivered the bleak assessment as one possible future for Australia in a pre-budget speech yesterday.
While Mr Richardson said it was not the most likely future, he said it was certainly plausible for China's economy to falter.
"By 2019, two years from now, you would see our national income, the income of families, businesses, governments, falling away by $140 billion, if China stumbled,” Mr Richardson told the National Press Club in Canberra today.
"That would be 500,000 jobs.
"The Australian dollar would drop 15 cents against the US dollar, house prices would fall 9%, the share market would fall 17% and that combination would strip a trillion dollars of wealth out of Australia at the exact same moment that our wages would be being pressured,” he said.
"And because of the dollar going lower, you would find inflation, if anything, a little higher.
"To make the obvious point - you don't want this to be a future that Australia faces.”
Such an outcome would strip $40 billion from the Federal Budget in 2019-20 alone, he added.
Mr Richardson also dubbed house prices in Australia today "dangerously dumb”.
The nation needed to consider what would happen if our "world-beating” run of growth comes to an end, unemployment goes up and house prices go down, he said.
Australia no longer had the defences it had ahead of the Global Financial Crisis; interest rates have already been lowered, the Federal Budget is no longer in the black, and Australians have "borrowed up a storm”.
"Compared with the global financial crisis, our vulnerabilities are higher, our defences are weaker, and China would be part of the problem instead of part of the solution,” Mr Richardson said.
China had built too much, relied too heavily on debt in doing that building, and there was now significant oversupply.
"To be clear, we're not forecasting a China crisis - it is not the most likely thing to happen,” Mr Richardson said.
"In fact, in 2017, China is looking better than it has in any year since 2011.
"But this is something that's entirely plausible.”
Treasurer Scott Morrison has made tackling housing affordability a key plank of this year's Budget, But he's also conceded there's no single budget solution. He blames previous Federal Governments for not dealing with pressing housing issues for fear of raising and disappointing expectations.
"There is always that risk,” he admitted during a speech this week. But is Morrison wasting his time?
Richardson says interest rates are a better weapon to influence house prices.
"Much more important than what governments do is what the Reserve Bank does,” he told Sky News prior to his NPC speech.
"The only other thing that can move housing prices is a recession and high unemployment, and you certainly wouldn't want that.”
Still, that hasn't stopped the major parties going toe-to-toe on housing.
At the last election Labor presented a proposal to limit housing tax concessions to voters as a means of taking some of the heat out of a market where investors are growing in dominance.
Negative gearing would be limited to new properties, and present arrangements would be grandfathered but not totally scrapped - as the government argues.
Mr Morrison says negative gearing is an "established and structural” component of the market and removing it would "playing with fire”.
However, federal ministers appear less committed to protecting the 50% capital gains tax discount, raising speculation it might be trimmed. Labor would cut it to 25%.
Meanwhile, Australians are being asked whether first home buyers should be allowed to tap superannuation to help build a deposit, riling Labor and caused frictions within the government.
A key Senate crossbencher described the idea as "crazy”, while one super industry representative thought it would have a "devastating” impact on savings and push house prices even higher.
But former prime minister Tony Abbott says people should be able to spend their super money on housing now, rather than in retirement in 30 to 40 years. It's estimated a buyer today needs to eight years to save for a Sydney home deposit, and six years in Melbourne.
Michael Sukkar, the minister helping Morrison put together a housing affordability package, has confirmed the government is looking at measures to help people raise deposits.
The goal is to get people into the market as soon as possible "otherwise the goalposts keep shifting”.
As Mr Richardson calculates, tapping super for a housing deposit could lift prices by a further 1% against already "dangerously dumb” levels.