China Slowdown a Big Risk for Australia

January 16th, 2015
The economic slowdown in China continues to threaten Australia. In its latest report on global economic prospects, the World Bank said any major shock from China, coupled with falling commodity prices, would be a double blow for exporters like Australia. However, positive signs are emerging for a managed slowdown as China opens new doors and the Australian economy continues to diversify beyond the resources sector.

China is expected to post its lowest annual gross domestic product figures in 24 years. ; After years of double digit growth, China's GDP has been close to 7.4 percent for much of 2014. ; According to World Bank director of development Ayhan Kose, "Chinese authorities are well aware of the problems, and they have undertaken measures to deal with the problems, and they are calibrating their policies and we are confident they will do that... ; It is good news for the global economy, but at the same time you should make sure you are ready when financing becomes more expensive."

The World Bank has downgraded its global growth forecast for 2015 from 3.4 percent in June to 3 percent today, due mostly to dropping expectations in Europe, Japan, and China. ; With the forecast for US growth lifted slightly to 3.2 percent, however, the global economy still looks to expand this year from 2.6 percent growth in 2014. ; While the economies of Europe and Japan remain shaky, unknown conditions and the sheer size of the Chinese economy remain the biggest risk factor, especially for Australia.

"China as a risk factor is there but we think it is a very low probability event because China has substantial policy room to react." said Kose, adding "A slowdown in China would dampen activity in the entire region, because of the size of the Chinese market and the close trade and investment links. Since it would likely be associated with commodity price declines, commodity exporters would suffer a double blow."

China accounts for just over 30 percent of all Australian exports, compared to the US at about 5 percent. ; However, it's difficult to measure China's true influence on the Australian economic landscape, with the huge economy affecting local conditions both directly and indirectly. ; While resource exports to China account for just 6-7 percent of the Australian economy and the other 93-94 percent isn't directly exposed, China has a huge influence on the global economy with an estimated purchasing power of .4 trillion.

As the resources sector continues to slow, Australia’s free trade agreement with China provides our financial services sector with a unique opportunity. ; With an unprecedented opening to the capital markets of the world’s second largest economy, Australian banks, insurers, investment managers, and securities firms are in an interesting position. ; As China’s economic model focuses on new sources of growth through domestic consumption and more open markets, Australia can dampen the impact of the slowdown by finding new ways to interact with the Asian giant.