Ross Garnaut on Australia’s China bust

Find above MBTV’s inaugural interview with Professor Ross Garnaut on the magnitude of the structural shift underway in the Chinese economy and the difficult adjustment ahead for the Australian economy.

In summary, Professor Garnaut’s points are:

  • current conditions in China are subdued
  • a renewed stimulus package is possible in the next few months, however it will be focussed almost entirley on energy efficiency and environmental amenty, not infrastructure
  • China is managing four simultaneous structural shifts: a shift away from exports; a shift towards growth in its interior provinces driven by investment in soft infrastructure like education, health and and a social safety net; a shift away from infrastructure-led towards consumption-led growth, and a shift towards industries with greater environmental amenity
  • the balance of these four shifts is a significant downwards shift in the contribution of metals and energy intensive growth to GDP
  • we are approaching (or at) an overhang in global bulk commodity supply capacity and prices will need to fall far enough to knock out high cost production
  • Australia’s real exchange rate is far too high for this emerging context and the dollar will need to fall as much as 40%
  • a huge expansion in investment in non-mining tradable sectors is required if Australia is to grow through the forthcoming fall in mining investment, which will return to its historic average of around 2% of GDP from around 8%
  • LNG is a positive story with China’s environmental push set to strongly boost its demand however North America’s and Russia’s entry into the North Asian market makes the market highly contestable. No new projects can be expected in Australia for the foreseeable future.

Enjoy!

 

Comments

  1. Good post, I like the way when he talks about adjustment he uses much the same tone of voice that doctors do when they talk about ‘procedures’

    Why are there so few other eminent economists identifying the issues and implications of what is on the verge of unfolding here?

    • Nobody wants to admit the horrible truth.

      Australia is a one trick pony and China is tired of seeing the same expensive pony.

  2. It would be great to see Australia head towards some more technology innovations and healthcare technology companies. Something like a Facebook, Yahoo, Hospital Corporation of Amercia (Largest Hospital company in the US who is also in Europe now) etc…… Having worked as a Systems and Network Engineer down in Australia for 5 years and 3 as an IT recruiter there are some very talented people down there. I use to see good ideas and some very talented people. Also there are some good technology companies. If the government wants to stimulate the economy put some more money towards this and healthcare. Quit putting everything into Housing, Negative Gearing, Mining etc……..

    • “Quit putting everything into Housing, Negative Gearing, Mining etc……..”
      Sadly, its the only thing the voters know…

    • Sadly Australia doesn’t have the culture to innovate anymore. There’s a few pockets, but nobody is interested in the risk of new ideas. It also doesn’t help that just to pay rent/bills/food is so expensive that bootstrapping an idea requires huge risk to your family. The structure of our houses and holes economy is not suited to small innovative companies.

      Speaking of which, I was really impressed when I visited Japan recently. Suburbs are full of small businesses operating out of houses. It showed me that how much Australia has destroyed the small business.

      • I agree with your comment on small business. Take Paris or NYC for example where boutique and artisan shops are the norm. People also do a lot of their food shopping at farmers markets and pay a premium to support local farmers. I actually overheard an Aussie lady here in NYC say shopping was better in Australia because she only had to go to the one shopping centre and not do ‘all this walking around’…

    • ” there are some very talented people down there. I use to see good ideas and some very talented people. ”

      I work in IT too and I see good ideas and some very talented people taking them overseas. Part of my role is managing technology innovation but whatever we come up with we give away for free to our Silicon Valley based partners so they can implement it and we can sell it here.

      • JPK I saw that myself and its shame the govt doesnt create some kind of grants or financing for these people to leave it in Australia. LIke I said I cant believe the govt only knows mining, housing and creating more debt to the moon.

    • Exactly!

      ‘A currency adjustment of between 20-40% wouldnt surprise me’

      They can start about there. They can nut out if they are going to manage that process or if they are going to have it shoved up them by global markets while they perpetuate denial.

      ‘I see no reason why the mining contribution to the economy wouldnt revert to historical average’

      …….The economy will need to emphasise the high-value manufactures, services etc to generate an economic rebound. They will need to be competitive globally, there will need to be a significant amount of work done on productivity reform.

      Tonnes of good stuff there….

  3. Sometimes it is worth pointing out that Chinese politicians/businessmen are as much prisoners of China’s past successes as Australia’s elite are prisoners it’s Holes/Housing economy. Everyone would like it to be different BUT they must make the transition to something new without killing what exists.

    In Australia rent seeking behavior has been inordinately rewarded that today we have an entire business community that can scarcely imagine any other form of enterprise, and they certainly wouldn’t invest good money in anything else. In the same vein Chinese businessmen know how to build infrastructure and run export businesses. Chinese city governments rely on fees from developers just to survive another year, so they definitely dont want the ride to stop(or even slow down).

    The Chinese economies restructuring/rebalancing must somehow occur within these constraints. So I’d expect the real significant shifts to only occur when China literally runs out of other options. Personally I see the resurgence of the USA as good news for China (and Australia) because it delays the inevitable changeover from a US imperial world to a Chinese imperial world. This delay will give them more time to make adjustments to their economy and build a customer base that truly embraces consumerism.