Economists look to US and China for risks in 2019

By Tim Boyd

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A worsening of the relationship between China and the US is the most-tipped black swan-type risk for the global economy, according to leading Australian economists. 

The first quarterly survey of economists in 2019 by The Australian Financial Review shows that trade tensions between the US and China, cyber security concerns, OPEC's output discipline and a slowdown in Australian tourism are on economists' radars as potential threats to stability and growth. 

Seven economists surveyed raised China's relationship with the US as a potential risk that could have far-reaching consequences, stemming from trade tensions that erupted in 2018.

Economists say trade tensions between the US and China are a key risk for 2019. Andrew Harnik 

"More overt retaliation from China to the US and Western developed countries more broadly, in part fuelled by trade and IP tensions, is a key risk," RBC Capital Markets chief economist Su-Lin Ong said. 

Ms Ong said for Australia's relationship with China, "the decision to ban Huawei from Australia's 5G network may have longer-term consequences for an increasingly complex relationship". 

Laminar Capital senior economist Stephen Roberts identified a trade war between the US and China escalating to a cyber war as a black-swan type of risk. 

Military confrontation possible 

Adjunct professor at UTS Business School Warren Hogan said an impending US election could cause President Donald Trump to behave more adventurously regarding China, with military confrontation on his risk radar. 

"In the realms of geopolitics, there can be no guarantees that the US-China relationship does not deteriorate further to the point of military confrontation. An erratic and unpredictable US president facing a possible defeat at the 2020 election may become increasingly adventurous in its foreign policies," he said. 

Moody's Analytics economist Katrina Ell said markets had assumed China had a "solid grip" on its economy and if demand fell, greater stimulus would be released by the government to compensate. 

However, if this assumption were wrong, this was another risk for policymakers to reckon with. 

"If policymakers miss something and Chinese demand slips through the cracks, then it will have far-reaching global consequences and Australia will not be immune, given its heavy reliance on Chinese demand," Ms Ell said. 

AMP Capital chief economist Shane Oliver agreed that Chinese growth falling was a key risk with global consequences. 

"This would weigh on global growth but it would particularly weigh on Australia via lower commodity prices and export volumes pushing up unemployment, adding to potential debt-servicing problems for those with a mortgage and hence driving an even deeper slump in property prices," Dr Oliver said. 

QIC chief economist Matthew Peter nominated a drop in oil prices as creating recessionary risk for oil-dependent emerging-markets producers. 

"A collapse in OPEC discipline that resulted in a supply surge that drove oil prices to $US30 would see Russia, Brazil, the Middle East and other emerging-market oil producers thrown into deep recession," Dr Peter said. 

If the US and China tariff hikes recommence and the oil price dropped to $US30 that would be enough to push developed economies into recession too. 

Oil prices tanked in 2018, Brent crude reached $US53 a barrel on Wednesday, falling from a high in early October of $US87 a barrel. 

Risks associated with debt coloured Industry Super Australia chief economist Stephen Anthony's outlook. Mr Anthony said a "debt crisis related to Asian financial institutions, especially insurers, that have propped up returns by backing risky, interest sensitive investments" was a concern. 

"Prudential debt risks in Asia and certain southern European economies are extremely high," he said. 

Deutsche Bank economist Phil O'Donaghoe said a risk he would be watching in 2019 is a downturn in Australian tourism and education services. Mr O'Donaghoe said these valuable exports were particularly vulnerable to changes in foreign government policy. 

"My sense is that there is a growing dependency on these exports as a source of income, without sufficient regard to the 'policy risks' to which they are exposed," he said.