China Gifts Australia Low Interest Rates

You may be familiar with my thoughts on how China has been the saviour of the Australian economy, particularly at a time when the western world suffered a severe slow down during the GFC. I also believe that China has greatly contributed to keeping interest rates lower than they would have otherwise been, the world over.

Australia is a major beneficiary of China’s success, as much as any other country However, it is more of a mixed bag for Australia, as the demand for our mineral and agricultural products has also generated upward price pressures in some sectors of the economy -mining and agriculture. Nevertheless, the benefit of lower interest rates around the world, a function of China’s price competitive nature on manufactured goods, has flooded into Australia.

While the Reserve Bank of Australia kept rates artificially high, Europe and the USA slashed their rates to near zero many years ago now. They were able to do this because inflation had been falling for some time. Not just because of the GFC, but due to increased competition from what was once third world countries that quickly became the “new first world”. China in particular, began flooding the world with low priced goods a couple of decades ago now.

Low interest rates are part of the reason the US and now Europe, are beginning to do so well again. It is not, however just because interest rates are low, but also due to the increasing recognition that even though rates may rise a little, they are most likely going to be at very low absolute levels for many years to come. Low interest rate stability is an awesome force in business and for property investment.

This again, is due to the competitive nature of all, of what I like to call “the new first world” of Asia and Latin America.

The “bottom-up economic revolution” (as I have termed it) of the working and middle classes across Asia and Latin America are being empowered by the internet, and has led to unprecedented rivalry around the world for what use to be captive markets. It doesn’t matter what the product is, it can probably be made almost anywhere these days, and there are plenty of people and communities aspiring to compete with the biggest manufacturers in any niche possible.

This has led to true competitive price pressures, the likes of which the world economy has never before experienced. This intense competition keeps prices extremely low everywhere.

This means low inflation - which in turn means low interest rate settings by the various central banks around the world. As the global economy is truly competitive now, between nations as well as corporations, there will be continued downward pressure on Australian interest rates as the global environment becomes a bigger part of any central bank’s decisions making.

If it wasn’t for China and the new age of global competition, our not-so-bright RBA would still most likely prefer to have official interest rates near 5.00%.

So we have a lot to be grateful to China for. Booming minerals and agricultural exports, strong investment, including property, and last but not least, a sustained new age of low inflation and low interest rates. In summary, China has made it easier for Australians to afford property in terms of mortgage rates, while at the same time supporting and nudging prices higher.

It really is a good time to be investing in property.

Clifford Bennett International Economist www.cliffordbennett.com.au