Economists say a reluctant Canberra may need to spend cash to get Australia moving as ASX200 index falls for fifth day in a row

This article is more than 1 year old

This article is more than 1 year old

An escalating trade war between the US and China has pushed the Australian stock market down for the fifth day in a row, with the benchmark ASX200 index dropping more than 2.4% on Tuesday.

Economists played down the damage to superannuation savings of the drop in a market that just last week reached a new high not seen since the 2008 global financial crisis.

However, they warned that if the battle between the US and China continued, the Morrison government might need to tip cash into the Australian economy to reduce the chance of a recession.

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Tech stocks led the rout on Tuesday morning. Shares in logistics software company Wisetech Global were the worst performer, tumbling 8%, while those in mining services group NRW Holdings were the exchange’s second-worst, falling 6.82%.

Accounting software company Xero fell about 6%, employment website Seek dropped 6.5% and buy-now pay-later outfit Afterpay, which has been a market darling, slumped 4.9%.

But no sector was spared, with retailers, financiers and miners all down as a wave of red swept the board.

Global markets have been falling for the past few days amid an escalating stoush between the US and China, driven in part by president Donald Trump, who has long attacked China over its trade surplus with the US.

Last week Trump said he would slap tariffs on consumer goods imported from China. In response, China has allowed its currency to fall, making its goods cheaper overseas, and banned the import of US farm goods.

The war leaves Australia caught between the US, its key strategic ally, and China, its major trading partner.

Since peaking last week the ASX200 has tumbled more than 5%, putting the index back at levels last seen in early June.

Stephen Anthony, the chief economist for Industry Super Australia, which represents union and employer body-controlled funds that look after about $700bn in retirement savings, said the market’s fall was a “material adjustment”.

However, he played down the trade war’s impact on superannuation.

“Are we getting nervous yet? No we’re not because we invest for the long-term and it doesn’t have a bearing on our strategy.”

He said he had faith in the international trade system overseen by the World Trade Organisation and was confident it would “outlive this current spat”.

“What we’re seeing now is the first moves towards a global economic system that is not US-centric,” he said. “This spat is something that has to happen.”

He said that if the Chinese government decided to stimulate the economy by pumping in money to build infrastructure, Australia would benefit through increased purchases of the raw materials it exports to China.

However, he said China might instead allow its currency to fall further.

“If that’s the case there is a risk for Australia,” he said.

He said the Australian government could do its own stimulus, both through changes to tax policy and “very targeted” spending on infrastructure.

“Things that we were going to do anyway, but let’s do them now when the economy needs a bit of a kick-along.

“At the first sign of a material downturn we should roll it out.”

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He said corporate tax should be replaced with a tax on cashflow, stamp duty abolished in favour of land tax and the GST broadened to tax more of the economy.

Independent economist Saul Eslake, a former chief economist for Bank of America Merrill Lynch, said Australia was less exposed to a slowdown in the US economy than other countries including Japan, European countries or China itself.

“We are exposed to a slowdown in the Chinese economy,” he said.

He said that while the Chinese government had in the past been willing to spend to pull the economy out of a hole, this time “they might be doing it by letting their currency go, and it’s not clear that would be as good for Australia as an infrastructure boom”.

He said that with Australian interest rates at record lows, the Reserve Bank had no ammunition left to stimulate the economy.

“And while we have more fiscal capability to respond it’s not clear that the federal government wants to, given the importance they’ve put on a [budget] surplus,” he said.

“There’s a political dimension to it as well, that Australia has never been in before, that our principal economic partner doesn’t see the world through the same economic lens as our principal political partner.

“Over the next 20 years we could be in the situation where we have to make some difficult choices.”