Australia’s worsening woes are a warning sign for neighbouring Asia

In the 25 years since Australia had its last recession, its central bank withstood more crises than it can count: Asia’s 1997 meltdown, Wall Street’s 2008 crash, Japanese deflation, US Federal Reserve tightening cycles. But it’s taken the likes of Donald Trump to restore the laws of economic gravity.

Recently, Reserve Bank of Australia governor Philip Lowe named the US president’s policies the biggest risk to the global economy. Australia’s quarter-century growth marathon, too.

That might sound alarmist.

The nation grew an annualized 3.1% in the second quarter, beating expectations. Below the surface, though, are clear signs that Australia’s long growth run looks tired.

Tepid household income growth, for example, is restraining consumer spending, or about 60% of the economy. Now, falling commodity prices deepen the plot.

The tumble in goods prices bears Trump’s fingerprints. Though the White House’s trade war targets Beijing, Australia’s resource-rich economy is arguably the biggest leveraged bet on mainland growth.

China’s rapid growth and voracious appetite for iron ore, coal, copper, nickel and aluminium to feed an epic infrastructure boom provided a powerful tailwind Down Under. That exposure is rapidly morphing into a liability as Trump’s tariffs slam the mainland—and in ways that should worry Asia.

Singapore and South Korea show telltale signs of wear. As open, export-reliant economies, both play a weathervane role for global-trade inflection points. And at the moment, both are flashing something approaching red.

Manufacturing activity in Singapore shrank 0.1% in the second quarter from a 21.3% jump in January-March period. The construction sector plunged 14.6% between April and June.

In Korea, meantime, exports stopped on a dime in June, contracting 0.1% versus a 13.2% surge in May.

Japan central bank’s “tankan” survey showed a three-point drop in business confidence between March and June —the period in which Trump began rolling out tariffs. Trump’s threatened 25% tariff on car imports would savage Japan Inc.

Australia raises the alarm factor partly because an economy impervious to global fallout is now vulnerable. It’s a concern, too, because of what trends there say about China’s economic health.

It’s become a punditariat cliché to doubt the veracity of Beijing’s data. To fill in the blanks, economists track everything from electricity usage to rail cargo shipments to loan disbursement to Alibaba’s online sales.

Another approach: track places most tied to mainland zigs and zags within global supply chains. That means Singapore, Korea, Taiwan and now Australia.

Trouble is, there’s no telling where Trump will stop—especially as China’s Xi Jinping retaliates.

Ignore Trump’s claims of a “deal” with the European Union. It’s just a deal to discuss cutting levies, talks that could be undone with one early-morning Trump tweet. Trump is still eyeing as many as $505 billion of Chinese tariffs, based on the amount of goods the mainland sent America’s way last year.

That gets us back to RBA chief Lowe, who’s as much on the front lines as any monetary official. On 3 July, Lowe’s team left the benchmark cash rate alone at 1.5%. There had been speculation that solid growth might give the central bank confidence to get the rate a step further away from zero. Instead, Lowe is bowing to signs China is cooling, housing prices are softening and commodities are taking hits. And then there’s Trump.

“One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States,” Lowe said. And yet, so much has transpired in the last month to think Lowe’s views have darkened since then. That includes a tariff arms race and Trump’s stepping up efforts to weaken the US dollar.

It’s not like Malcolm Turnbull can do much to shield Australia from Trump’s wrath. Things between Australia’s prime minister and Trump got off to a dismal start in January 2017. Trump effectively hung up on Turnbull over a disagreement involving asylum seekers. The best Canberra can do is manage the Trump relationship to limit the economic fallout.

That means staying nimble with monetary and fiscal pump-priming in the short run. The longer-run challenge is to diversify Australia’s economy away from China. For now, though, headwinds bearing down on Canberra are an omen of things to come in a region caught between two brawling giants.

William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.