Prolonged economic slowdown in China has become a growing concern for Australian policymakers, who along with most economists had previously anticipated a sharp rebound in economic growth following an end to harsh COVID-19 restrictions imposed by Beijing.
The International Monetary Fund’s (IMF) last World Economic Outlook report has forecast Chinese GDP growth of 5.2 per cent following historically modest growth of 3 per cent in 2022.
But recent data suggests the Chinese economic slowdown has not run its course, with the economy growing below expectations at 0.8 per cent in the second quarter of 2023.
This is tipped to derail Australian economic growth projections, given the economy’s exposure to commodity exports to China.
Modelling from Oxford Economics projects a 0.7 per cent contraction in Australia’s baseline GDP off the back of a 4 per cent drop in China’s GDP by 2026.
Commonwealth Treasurer Jim Chalmers has acknowledged these risks, adding the government is closely monitoring developments in China.
“I share the pretty substantial concerns that people have voiced about the Chinese economy,” Treasurer Chalmers recently told the media.
“It is concerning to see the weakness, the softness, in the recent weeks and months in the Chinese economy because it has obvious implications for us here in Australia.”
Speaking to InvestorDaily, AMP Capital chief economist Shane Oliver explained the underlying causes of laagered growth in China, adding it is unlikely the global economic powerhouse will rebound to pre-COVID heights.
“It is certainly something to be worried about. China is in a long-term downtrend anyway, it's just a question of how quickly that unfolds,” he said.
“Productivity growth is slowing down and their working age population is falling.
“So, the sort of 10 per cent growth rates that we saw in the 2000s are no longer possible.”
Over the longer term, Mr Oliver said he expects China’s annual GDP growth to hover around 4 per cent.
“There was hope that this year, China’s GDP could be up as high as 6 per cent after the [post-pandemic] reopening, but that looks [unlikely],” he added.
He said a lack of fiscal stimulus from Beijing had stunted growth despite monetary policy easing, resulting in projected GDP growth of between 4.5–5 per cent this year.
The bright side for Australia
However, according to Mr Oliver, it’s not all bad news for Australia, which reduced its dependence on exports to China at the height of trade tensions during the COVID-19 pandemic.
“So far, we've been able to weather disruptions reasonably well, and there's several factors which suggest that it's not as bad as many fear,” he said.
“Goods exports to China over the last couple of years slumped from 40 per cent to around 30 per cent as a share of our total exports.
“So, a lot of the restrictions they tried to put in place in 2020 and 2021 didn't really dampen our economy too much because we were able to revert to other countries – notably Japan, which is still growing quite strongly.”
Moreover, the Australian economy is less exposed to Chinese tourism and the influx of foreign students.
“You can't lose what you don't already have,” he said.
“China used to be a big source of tourists and foreign students, but they haven't returned to the same degree as they used to, and some of the gap has been made up by tourists and students from other countries.”
But ultimately, Mr Oliver said he expects subdued growth in China to add to headwinds in the local economy, increasing the risk of a recession. This supports the case for a prolonged pause to interest rates before potential easing commences in mid-2024.
“It's an argument to leave rates on hold, even though it's probably not the most important consideration.”