The Australian Economy Can’t Afford a ‘Soft Landing’ in China

Most of us are aware by now of the problems China’s slowdown poses for the Australian economy. We talk about it often enough. Probably more than we need to. But no matter how often we repeat it, it’s worth repeating again. China’s economic slump is a big deal. In fact it’s the single biggest threat facing Australia in over two decades.

Of course, we’re not the only country facing pressures from China’s ongoing slowdown. To varying degrees, most commodity exporters are. But Australia is in a class of its own. When we panic about China, we do so for good reason.

To see why, take a look at the chart below.


Source: Oxford Economics

There’s Australia. Way out in first place. Over 35% of our exports go to China. You’ll notice no other country exports more than 30% of its goods to China. Not Korea, which is on China’s doorstep. And not Taiwan, joined as it is to China’s hip.

Now look at the chart below. It shows how dependent economies are on commodity exports.


Source: Oxford Economics

As you can see, Australia is the fourth largest commodity seller as a percentage of GDP. Over 15% of our nation’s GDP comes from exports. Only Russia, Venezuela and Chile are ahead. In the case of the first two, you’ll notice that oil makes up a large portion of exports. For non-oil commodities, only Chile exports more than Australia as a percentage of GDP.

These two charts show the extent to which China’s slowdown impacts Australia. We have few international peers when it comes to this. They’re bar charts with little depth to them. But as visual cues go, they ring alarm bells for the Aussie economy.

When you hear people talk about China’s slowdown, it can often come across as repetitive. Almost to the point that it blunts the real effect this has on Australia. And also the effect that it will continue having as China’s economic slowdown unfolds.

One story developing now is that China’s slowdown will be gradual. In other words, policymakers will attempt to manage the decline in order to prevent the Aussie economy from crashing. This is the so called ‘soft landing’ you’ve probably heard about quite a bit. In their estimate, a soft landing equates to GDP growth of 6.5% up to 2020.

Truth is, a soft landing is by no means guaranteed. As hard as China bulls try to convince you otherwise, even a soft landing is a big deal. A soft landing poses bigger problems for Australia than China itself.

Yet some economists continue harping on about how great 6.5% growth is. And, compared to the rest of the world, it’s pretty good. Not many nations are capable of such growth. Especially developed economies — happy with even 2% these days.

But you should be wary of any economists that paint even 6.5% growth as acceptable. It isn’t acceptable for economies that are heavily dependent on China.

That’s not a slight on China. But it’s the reality we in Australia face. Yes, 6.5% growth a year is fantastic. But no, it doesn’t help us improve Australia’s economic situation. Why? Because if a country’s demand for commodities slows, then its imports will too.

Any dip in Chinese GDP growth, however slight, is a problem for Australia. You only need look at those two charts again to see why.

Yet what would happen if the soft landing became harder? What if growth dropped to 6% in the coming year? Or perhaps even below that?

It may not be the reality next year, but it could be in a few years’ time.

Well, let’s consider first what it means from China’s perspective. The Middle Kingdom makes up 11% of the world’s GDP. And it’s directly linked to 10% of global trade. On the resource front, China accounts for 11% of global oil demand. And, crucially, it accounts for anywhere between 40–70% of demand for other commodities. Commodities like iron ore, copper and the sort that Australia specialises in selling.

In the decade between 2004 and 2014, China’s import sector rose on average by 11%. Yet in the first quarters of this year, imports are down 4%. According to Oxford Economics, China’s responsible for a 0.4% decline in global trade this year. That’s despite having added 1% to global trade each and every year going back a decade.

And that’s a China growing at 6.9% a year…

Now imagine shaving several percent off that. One tenth of global trade would suffer directly. But the indirect effect would be just as stark. How?

We know China’s slowdown affects the GDP of its major trading partners to a large degree. But these partners have their own trading networks too. So the spill over from China’s slowdown spreads around the world. In other words, it’s not just Australia, or Taiwan for instance, that suffer from China’s decline. What you end up with is a domino effect in which global growth cools, with China as the common denominator.

At the same time, China’s slowdown only adds more pressure on commodity prices. And with global commodity supply on the up, the effect on exporters is brutal. Not only is demand for commodities down, but the price at which commodities trade on markets is falling too.

For China dependent economies like Australia, that’s a matter of great concern. Whenever you hear that Chinese growth of 6.5% is fine, ask them ‘for who?’ It’s fine for China. It’s anything but fine for Australia.

Mat Spasic
Contributor, Markets and Money

PS: As China’s slowdown unfolds, the likelihood of a recession in Australia is gathering pace. Markets and Money’s Greg Canavan believes a recession could hit as early as this year. In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals how we’ve found ourselves in this position.

From falling GDP growth, to declining terms of trade, all signs point to a crash. Trade imbalances have been growing for the better part of a year. Government revenues are down, and household debt is up. It adds up to a recession that’s coming sooner than you think.

But there is a silver lining in all this. If you act now, you can protect yourself from the fallout of the coming recession.

Download your free copy today to learn how to protect your wealth from the coming crash. To find out how to download his free report right now, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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