The Economist has published an article examining the potential impact of a China ‘hard landing’ on a range of China-dependent countries:
According to The Economist:
A sharp slowdown in Chinese investment was one of the risks examined by the IMF in a report this month on the systemic five. Ashvin Ahuja and Malhar Nabar of the fund have calculated the impact on China’s trading partners of a one-percentage-point slowdown in Chinese capital formation. In the second chart, we have extrapolated their results. Our baseline is the IMF’s 2012 growth forecasts for each country (made back in April, a happier time). The chart shows the effect on growth of a soft landing, which we define as a two-percentage-point slowdown in China’s investment growth. It also depicts a harder landing, which we define as a 3.9-point slowdown, the same as it endured in 2008.
A hard landing would hobble South Korea and bring Taiwan’s growth to a shuddering halt. But growth in Brazil and Australia would hold up surprisingly well, perhaps because their currencies would fall, absorbing some of the shock. However, these estimates capture only the direct impact of a Chinese slowdown, as transmitted through its trade links. Messrs Ahuja and Nabar point out that stockmarkets around the world would also swoon.
For me, the potential impact on Australia’s GDP from a slowing Chinese economy is less important than the impact on Australian disposable incomes, which have grown at a much faster rate than GDP since the China-induced commodity boom kicked-off in 2003, pushing commodity prices and Australia’s terms-of-trade to near 140-year highs in 2011:
Essentially, the huge growth in Australia’s terms-of-trade was akin to Australia receiving a massive pay rise for the exports (commodities) that it produces, inflating personal incomes in the process, since more imported goods could be purchased from a given level of income.
In fact, analysis released last month by the Australian Treasury showed that around half of the growth of average incomes experienced over the 2000s was caused by the one-off rise in the terms-of-trade, and that income growth and the economy would face stiff headwinds in the future as the terms-of-trade unwinds (subtracting from national income):
The Treasury’s analysis was supported by recent analysis by McKinsey Global, which showed that 90% of the growth in Australian incomes in the seven years to 2012 was caused by the mining boom – via the rising terms-of-trade and the boom in mining-related investment (see below charts).
However, McKinsey warned that the income gains enjoyed from the mining boom were only temporary, and that Australia could experience little or no income growth over the next seven years if: 1) the terms-of-trade trended back towards its long-run average; 2) only two-thirds of advanced resource projects and one-third of planned projects come to fruition; and 3) there is no improvement in productivity growth.
Finally, let’s not forget that the sharp rise in commodity prices has also underpinned government budgets, which have reaped the benefit of rising personal and company taxes, as well as resource rent taxes. Some of this extra taxation revenue has been re-distributed to households via tax cuts and welfare payments, thereby further inflating disposable incomes. Should commodity prices continue to fall, households could face the prospect of rising taxes and lower benefits as cash-strapped governments attempt to plug fiscal holes, and pay the costs of an ageing population.
Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
