Unfortunately for Australia the parts of the Chinese economy that have been slowing are directly impacting its major exports, namely, bulk commodities. Commodity prices are lower now than what many expected a few years ago. This is putting significant pressures on the Australian mining and energy sectors and reducing the probability and viability of new projects. The downturn in mining and energy prices haves been more severe than most expected.
This drag on economic activity in Australia is likely to continue for at least the next 12 months as commodity prices remain low and the last of the new projects are completed.
Australia's economy is adjusting with low interest rates and a falling currency stimulating activity elsewhere. The weaker Australian dollar is now triggering some growth in export and import competing industries.
Housing is strong. It is so strong some are concerned about a bubble in Sydney and Melbourne. Importantly, strong housing markets are translating into increased construction and the jobs that come with that. This is the main leg of growth in Australia right now.
Rising house prices are also encouraging consumer spending on discretionary items, holidays and motor vehicles. Overall though, nothing is really strong. The NSW and Victorian economies are doing well, Queensland and WA are not.
We expect this mixed economy to remain in place for much of the next 12-months and are hopeful that as the headwinds from mining fade through the course of 2016, the rest of the economy will improve further. Our best guess is Australia's economy will remain OK for the next few years, unemployment will remain steady and, with that, interest rates should remain about where they are now.
AND THE REST…
Japan, Europe and the US all look OK right now. Japan and Europe have benefited greatly from weak currencies in the past 12-months while the US is getting set to tighten monetary policy (raise interest rates) for the first time in 10 years. These economies are expanding. The problem for the world economy is the advanced economies don't have much growth potential.
A pick-up in the developed world entails growth rising from around 1 per cent to 2 per cent. For the other half, the emerging economies, a slowdown could see growth fall from 6 per cent to 4 per cent or even 3 per cent. We already have recessions in Brazil and Russia, China and the rest of emerging Asia is slowing down. So despite some better economic growth in the major developed economies, overall global growth is unlikely to pick-up.
This is keeping markets nervous. No one really knows how far the emerging economies will slow, hence the focus on China right now. History shows economic slowdowns and financial crises in emerging economies can be quite severe. Yet there are reasons to believe Asia has much more of a buffer against financial problems than in the past.
We know less growth means the world's economies will continue to face challenges. But despite this, there remain many leavers policy makers can pull to address some of the issues. All eyes will be on China over the next several months. China is changing. The country will require reform and it will need to mobilise its army of consumers. But it's not bust - the bear's not knocking on China's door just yet.
This is an edited version of an address given to the ABF economists' breakfast.