WEF: Oz most affected by China slowdown

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By Leith van Onselen

The World Economic Forum (WEF) has published a short report analysing how slowing growth in China, along with its rebalancing from investment towards consumption, could impact the global economy.

Not surprisingly, the WEF believes that Australia’s economy will be most affected:

China has contributed as much to world GDP growth as the US in the past decade and a half, and even more than the world’s biggest economy since the 2008 financial crisis…

China’s re-balancing of its economy means that consumption (what consumers buy) will become a bigger part of the domestic economy than investment, and services will become a more important driver of growth than manufacturing. As a result, a Chinese slowdown will affect not just commodities and capital goods, but also global consumer demand and thus the profits of multinational companies in America and Europe…

The countries most affected by a Chinese slowdown are still likely to be those that export a great deal to China, notably commodity exporters such as Australia.

As Chinese demand for raw materials and commodities decline, there will be a knock-on effect in terms of their economic growth.

For Australia, China accounts for around one-third of all exports…

As China’s growth slows, its imports have fallen by 8% from a year ago… The slowdown has been felt in the commodity price falls seen throughout the summer that has led to tens of thousands of job losses by oil and coal companies globally, as well as others.

Undoubtedly, China’s economic adjustment is a “lose-lose” proposition for Australia.

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If China’s economy slows, then Australia loses out via less global demand for our resource exports, such as iron ore and coal.

In a similar vein, as China’s economy rebalances away from fixed asset investment towards consumption, it will also lower demand for Australia’s commodities.

The impact on the Australian economy from China’s transition will manifest through multiple channels, including:

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  • Lower national income from falling commodity prices and the terms-of-trade;
  • Less Budget revenue (both state and federal), resulting in bigger deficits, reduced expenditure and/or tax increases (e.g. via bracket creep);
  • Higher unemployment, not just in mining-related areas, but also the public service and consumer-dependent sectors;
  • Below trend economic growth (although the impact will be much less than for national income); and
  • A lower exchange rate and lower interest rates than would otherwise be the case.

All of which makes boosting productivity paramount if Australia is to enjoy rising living standards.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.