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Treasurer vows to take ‘necessary actions’ for economy as US recession fears spook markets

Mr Frydenberg said the biggest challenge facing the economy was the growing trade tension between the US and China, which was now “weighing heavily” on global trade, capital and investment levels.

The sharp fall on the S&P/ASX 200 was preceded by a 3 per cent drop in New York’s Dow Jones Industrial Average, with the major banks, miners and firms exposed to China all suffering, prompting analysts to slash the odds of another two official interest rate cuts this year.

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The Treasurer told The Sydney Morning Herald and The Age that the government’s $158 billion tax cut package and $100 billion infrastructure pipeline would help sustain economic activity, and noted Australia was one of only 10 developed countries to have a AAA credit rating.

“We will continue to closely monitor global economic events and will take the necessary actions to ensure our economy continues to grow to the benefit of all Australians,” Mr Frydenberg said.

“But with strong foundations, our economy is positioned as well as any nation to withstand these challenges.”

A combination of poor economic data out of China, signs that Germany – the world’s fourth-largest economy – may be in recession, and more evidence that American businesses are cutting investment plans all contributed to market turmoil on Thursday.

Treasurer Josh Frydenberg says the fundamentals of the Australian economy are strong.

Treasurer Josh Frydenberg says the fundamentals of the Australian economy are strong. Credit:Justin McManus

One of the architects of Labor’s response to the 2008 global financial crisis, Andrew Charlton, said the government needed to be ready “to use both fiscal and monetary firepower” to support the economy.

“The Australian economy is a bit like a forest that hasn’t had a backburn for a long time. That should make everyone nervous,” the former chief economic advisor to Labor prime minister Kevin Rudd said.

“There should be no prizes for delivering a surplus in a weakening economy.”

The Commonwealth Bank on Thursday changed its call on interest rate settings and is now predicting the Reserve Bank of Australia will deliver two more cuts by February to take the official cash rate to a new record low of 0.5 per cent.

CBA economist Gareth Aird said the darkening global clouds, and an unwillingness by the Morrison government to sacrifice any of its budget surplus to help the economy, meant the RBA would have to cut rates.

Even better than expected job figures did nothing to address the fall on the local sharemarket. The Australian Bureau of Statistics reported the nation created an extra 41,100 jobs in July, of which 34,500 were full-time.

Despite the large lift in employment, the jobless rate was steady at 5.2 per cent due to the participation rate – the number of people in work or looking for it – climbing to a record high of 66.1 per cent.

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NAB chief economist Alan Oster, a former Treasury official, said some other parts of the economy “are just terrible”.

“Our own business survey suggests that July was not good and our internal data also says that July was not good.”

Former US Federal Reserve chair Janet Yellen cautioned against reading too much into the bond market.

“It’s historically been a pretty good signal of recession and I think that’s why the markets pay attention to it, but I would urge that on this occasion it may be a less good signal,” she said.

The rare inversion of short- and long-term bond yields suggests investors believe there is a higher risk of a downturn in the next two years than there is over the next decade.

Dr Charlton said the risk of a recession ahead of the US election in 2020 could prompt President Donald Trump to pull back from his trade war with China, but it may not be enough to stave off a downturn.

“It could not have come at a worse time as the global economy is slowing, China weakens and the European Union weakens,” he said.

“The risks for Australia are very real. We are vulnerable to an external shock right now.”

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