China slowdown no threat to Australia, economists say

“There will be new markets beyond China and these markets could be even closer to home in South and South-East Asia,” said Warren Hogan, an economic adviser to Judo Bank. He argued that Australia’s economic success was not just about selling coal and iron ore to China, but rather selling those commodities to other steelmakers around the world.

The main driver of global growth, according to Mr Hogan, was now moving south towards India and the Mekong Delta, with the slowdown in China’s economy affecting Australia only “at the margin”.

Optimist club

What is more, Australia had already started to reduce its exposure to the Asian giant’s fortune, said Ben Picton, a senior strategist at Rabobank. This was reflected late last year when the Reserve Bank lowered the Chinese yuan’s proportion in the Australian dollar trade-weighted index (TWI) to 31 per cent from 37 per cent.

The TWI is the price of the Australian dollar against a basket of foreign currencies based on their share of trade with Australia, which is why Mr Picton said he expected Australia to “muddle through” China’s weakness.

“Unless China’s economy actually shrinks – growth turns negative – production capacity will likely remain the constraining factor for Australian iron ore output,” added Phil O’Donaghoe, at Deustche Bank.

There are already signs that the worst of China’s slowdown could be behind it, with economic data suggesting signs of stabilisation.

JPMorgan and ANZ last month upgraded their 2023 China growth forecast to 5 per cent and 5.1 per cent, respectively. Adam Boyton, ANZ’s head of Australian economics, noted that industrial production, retail sales, exports, and inflation data in China had exceeded expectations in August.

“By no way is China out of the woods, but our sense is that we have passed peak pessimism,” said Prashant Newnaha, a macro strategist at TD Securities. He added that Chinese trade data showed imported volumes of copper, iron ore, and coal had been trending higher for several months.

Stimulus hopes

Other economists are not so sure. Both Commonwealth Bank and National Australia Bank downgraded their 2023 Chinese GDP forecast to 5 per cent due to the deteriorating property market and subdued consumption.

“Chinese authorities have resisted major stimulus, instead implementing modest relaxation of monetary policy across the year such as increasing liquidity by reducing required reserve ratio for banks in September that has, so far, had little impact,” said NAB’s chief economist Alan Oster.

“Slower growth in China is generally impacting the global growth outlook and business sentiment, all of which could weigh on Australia’s growth outlook,” he added.

CBA, however, is more optimistic on a 12-month horizon. It has upgraded its GDP predictions for 2024 to 5.3 per cent, from 5 per cent, based on the assumption that Beijing will unveil a large economic stimulus package before the end of the year.

Earlier this week, Bloomberg reported that Chinese authorities were considering raising the country’s budget deficit and mulling the issuance of additional debt for infrastructure spending.

For some analysts, much of the Australian economy’s fate comes down to iron ore prices because they can be a boon to mining profits and government tax receipts.

Iron ore on the Singapore Exchange is hovering around $US113 per metric tonne, well below the $US126.41 reached in June 2022. They have collapsed on concerns about the health of China’s property market, which accounts for a quarter of the economy, after a string of debt defaults by cash-squeezed developers.

Goldman Sachs chief economist for Australia Andrew Boak estimates that iron ore prices would need to tumble below $US60 a tonne to hit the Australian economy.