The largest risks to the global economy were health-related, on the Covid-19 pandemic, and inflation concerns, which could trigger tighter monetary conditions that might impact commodity prices and demand, the Reserve Bank of Australia (RBA) said.
The most significant downside risks to global and domestic economies are health related, the RBA said in its latest quarterly statement on monetary policy. The economic outlook from the RBA is similar to that of the International Monetary Fund last month.
The global outlook is also subject to a range of risks outside the health sphere. "If the upswing in global inflation turns out to be larger or more persistent than currently expected, it could trigger an earlier and larger tightening in global monetary policy," the RBA said.
This could be disruptive, particularly for some emerging market economies, it added. The Chinese economy is subject to some specific risks related to the various policy trade-offs that the authorities have made.
"There are also risks to the Chinese economy should a widespread outbreak of Covid-19 occur and require large-scale suppression measures there. Geopolitical risks have also come to the fore in recent weeks," the RBA said. China is Australia's largest trading partner, accounting for around 34pc of Australia's total exports in 2021.
A larger-than-expected slowdown in China's economy would reduce demand for iron ore and other commodities. "This would be particularly relevant to Australia," the bank said. "Alongside lower resource export volumes, this could result in a decline in commodity prices, impacting Australia's terms of trade, corporate profits and tax revenues. Further trade restrictions could also delay the recovery in Australian exports."
Australia's terms of trade are expected to decline over the forecast period to June 2024, after reaching a record high level in the July-September 2021 quarter, it said. Australia reported a record trade surplus of A$122bn ($87bn) in 2021.
An increase in energy-related export prices, particularly for LNG and thermal coal, is offset by higher import prices in the forecasts. Iron ore prices have been above $100/t since the end of 2021, but are forecast to gradually decline to around $80/t by the end of the forecast period, the bank said.
Iron ore prices have been volatile in recent months, in contrast to energy commodities, but remain well below their historically high levels in early 2021. Prices fell early last year as Chinese authorities enforced steel production curbs, but have retraced about half of the fall in the past two months because of a stronger outlook for steel demand from the real estate and infrastructure construction sectors, the RBA said.
Australian households' confidence and willingness to spend their accumulated savings could be higher if health outcomes are better than expected, the central bank said.
