International trade update

How can Australian business adapt to address the slowing growth internationally?

NAB’s Head of Australian Economics & Commodities, Rob Brooker, shares the latest economic and trade updates.

The year to date
Global growth softened in the first half of 2011 – particularly in the big developed economies, which can be partly attributed to higher oil prices, adverse weather, policy tightening in Europe and Asia and impacts of the Japanese disasters. Recent financial market volatility underlines the continuing risks to growth from sovereign debt concerns in many economies. Yet despite these bottlenecks to growth, some sectors will continue to thrive, according to Brooker.

NAB expects industrialisation of China and India to support global demand for coal, iron ore, metals and many farm products. Feeling the squeeze, however, will be some exporters. A strong outlook for Asia, and Australia’s connection to it, is likely to create continuing strength in the Australian dollar, placing pressure on exporters outside mining and agriculture. Exporters of manufactured goods and business services, as well as domestic tourism operators, are examples of sectors that may find the going tough for some time to come.

US business focus
With the Australian dollar high and the US economy very weak, Brooker says Australian exporters to the US will need to identify and capitalise on niche opportunities, particularly in fast-growing industries where American producers are struggling with short supply.

Not only do Australian exports to the US face stiff competition from the low US dollar, but Australian exports to third-country markets are often competing with US products as well. Prospects are tipped to be better in the medium term (in two years or so), notes Brooker. The US economy should continue to recover in underlying terms, he predicts, even though high unemployment, a poor fiscal position and a weak housing market will act as brakes on growth.

Chinese business focus
Recent slowing in the Chinese economy was to be expected given the previously exceptional pace of growth, plus supply disruptions and policy tightening. Over the long term, Brooker says that increased urbanisation is likely to fuel more road and rail investment and drive demand for energy and resources.

The demand boost for commodities will continue to support growth in the Australian economy. Chinese policy makers may be near the end of their tightening cycle as global growth slows and food price pressures seem likely to ease.

Although economic imbalances in China are a concern, long-term growth fundamentals for China remain positive for Australia in many areas of industrial support, including construction and mining, business services, education, tourism, agricultural support services and a wide range of research activities.

European business focus
The pace of growth in the Euro region has slowed recently. Brooker is only expecting a mild recovery in activity in the Euro zone which will not be enough to reduce high unemployment rates.  An important issue is the need to resolve European sovereign debt problems because this is a factor that is spilling over to the world may affect the Reserve Bank’s views about interest rates in Australia.

Wrap up
Like the Australian economy, the global economy is very much a patchwork at present. Emerging economies, while slowing, are still growing rapidly. The US and Europe have slowed and growth will be lacklustre at best, while Japan is recovering from its natural disasters. In this fast-changing environment, Australian businesses need to stay focused to make the most of growth opportunities as they arise.

This story was first published at NAB Business View Connect and is republished here with kind permission of the author.