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Australia’s Recession Is As Much A Problem For Biden As Sydney

If President Joe Biden is wondering where the U.S. economy is heading in the months ahead, his team could scrutinize data on retail sales, investment and employment. Yet better insights might be found 9,800 miles away in Sydney.

Australia’s sizable and open Group of 20 economy is often the closest thing the U.S. has to an early warning system. Not quite formally in Asia, Australia is certainly of the most dynamic trading region. The zigs and zags America experiences often show up down under first.

And at the moment, Australia is flashing something approaching red for the world’s biggest economy. A who’s-who of top economists there agree Australia is contracting (we’ll know for sure Wednesday when gross domestic product data are released). But forecasts at AMP Capital Investors, Citigroup, Commonwealth Bank of Australia and elsewhere agree that Covid-19-related lockdowns are nudging GDP into the red.

This ups the pressure on Prime Minister Scott Morrison’s government in Canberra to act boldly—both to accelerate getting vaccinations in arms and propping up growth. The most immediate challenge, though, is at Reserve Bank of Australia headquarters in Sydney.

Just a month ago, traders were almost certain RBA Governor Philip Lowe’s team would be tapering. It was a big deal. It would mean that a G-20 nation central bank viewed as a global weathervane was moving beyond the crisis stimulus of recent years. A promising sign for growth everywhere.

The expectation was that Lowe’s team would scale back on weekly bond purchases. Though the benchmark cash rate would remain effectively at zero, the symbolism would’ve shown the RBA was finding an exit from free money that neither the U.S. nor Japan nor Europe has found thus far.

Well, scratch that. Lowe won’t be reaching for the brake pedal anytime soon as the Delta variant upends recovery hopes. As Fitch Solutions warns, Delta is a “severe threat to Asia’s growth recovery in 2021.” It follows, then, that hopes for a more vibrant and normal 2022 are now increasingly in doubt. That goes, too, for China, the biggest trading nation.

All this augurs poorly for Biden’s economy as 2022 approaches. Not recession, perhaps, but also not a growth trajectory that produces GDP rates that exceed potential inflation. Such a scenario would not be considered catastrophic in, say, India or Indonesia. But in the U.S., which prints the reserve currency, it’s a deeply dangerous trajectory. And one that would not be easy for Federal Reserve Chairman Jerome Powell’s team to combat.

Looked at another way, though, events in Australia suggest that inflation worries in the west may indeed be overdone. As Covid-19 lockdowns persist, and even broaden, neither demand nor pricing power dynamics are likely to return to normal anytime soon.

It’s hard to generate much optimism when, as economist Shahana Mukherjee at Moody’s Analytics puts it, “previously well-guarded countries such as China and Australia are also in the fray with millions placed under new lockdowns.”

Mukherjee adds that “the challenges to Asia’s recovery are varied and evolving. In severely impacted countries such as Malaysia and the Philippines, restrictions have lacked effectiveness in containing outbreaks, thereby mandating an extension of inhibiting curbs. While others such as Indonesia have adopted a less conservative approach, there is a real risk that the economic costs of relaxing restrictions too soon may significantly outweigh the short-term gains from reopenings. In comparison, although India’s intense second wave has continued to settle, risks of an impending third wave remain pertinent and could result in a staggered revival over the next few quarters.”

The upshot, she says, is that the new Covid waves are increasing the urgency for Asia-region leaders to ramp up vaccination rates. “But,” Mukherjee adds, “even with this step-up in momentum, policy shifts in vaccine preference and supply issues are significant binding factors that will moderate the region’s progress and delay the timing of reaching herd resilience.”

Japan is experiencing record Covid-19 infections in the aftermath of the Tokyo Summer Olympics. As the government extends its already lengthy state of emergency, business and consumer confidence are sure to take fresh hits.

More troublesome may be what Australia is telegraphing about China. Hopes for a “V-shaped” recovery in Asia’s biggest economy have long since been dashed. Is Australia’s stumble indicative of bigger troubles to come? 

For 20 years now, resource-rich Australia has arguably been the globe’s biggest leveraged bet on Chinese demand. A succession of governments enthusiastically sent more and more aluminum, beef, coal, copper, gold, iron ore, petroleum gasses, wine and other products China’s way.

Now, slowing Chinese demand is leaving Australia in harm’s way. It’s more complicated than that. Canberra and Beijing are trading barbs over the origins of the coronavirus. Morrison’s government has enraged President Xi Jinping’s by demanding an investigation into how the virus started and China’s slow and opaque response.

Yet the flashing red lights emanating from Australia are a warning for leaders everywhere that the global revival isn’t as grand as hoped. And that’s as much of a warning for Biden as anyone.

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