MARKETS SPECTATOR: Brakes on the China boost

Want to be a contrarian on the Australian economy and the stock market? “Now is not the time,” says Morgan Stanley’s Sydney-based economist Chris Nicol. He has cut his economic growth forecast for Australia to 2.6 per cent this year and next, down from an earlier forecast of 3 per cent and 3.1 per cent respectively. 

Nicol’s downgrade on Australia is due in large part to China. Morgan Stanley, previously a China bull when others had turned sour on the world’s second biggest economy, has cut its economic forecast for China in 2013 to 7.6 per cent from 8.2 per cent and in 2014 to 7.6 per cent from 7.9 per cent.

China’s new leadership is more concerned with “stability” than “growth”, according to Morgan Stanley. “Getting a boost from 2009’s savior seems unlikely at this juncture for Australia,” writes Nicol in a research note.

“While the scope and scale available for the Reserve Bank to cut rates is meaningful – and a key barrier to outright recession risk – the absence of corporate investment intentions and a muddied fiscal policy outlook before the September election means that the necessary pickup in non-mining sectors is too long-dated to return high level indicators, such as GDP, to above trend levels any time soon,” adds Nicol.

At 1528 AEST the S&P/ASX200 Index was down 28.753, or 0.6 per cent, to 4695.70, after falling as low as 4658.60 or 1.4 per cent. The index has dropped 10 per cent from its 12-month high of 5220.987 on May 14.