The impact of reduced Chinese growth

China has experienced a sustained period of high economic growth. The World Bank tells us that China has posted growth rates that have averaged around 10% per annum since 1990. While this growth was never going to be sustained indefinitely, the question was always around China's transition to a new, long run growth path.

For Australia this transition is particularly critical. China was the destination of about a third of Australia's outbound merchandise trade in 2014 (approximately $90b - primarily in Iron Ore and concentrates) and 14% of our outbound services trade. On the import side, about one fifth or over $50b of our incoming merchandise trade came from China.

Our global modelling capability, similar to that recently used by the IMF, allows us to consider this transition in the form of scenario analysis.

Figure 1 - Chinese growth projections, history and projections

Source: IMF and Cadence Economics estimates

Figure 1 shows our long range growth projection for China from April 2015. Using the data at the time of that forecast we projected China would average around 5.3% growth per year to 2035.

We asked ourselves "what would the impact of a sustained one percentage point reduction in Chinese GDP growth from 2015 to 2035 be on Australian economic welfare?"

The answer was that Australia's gross national income was 0.8% lower in 2035 compared with our April forecast. For every Australian, in today's terms, this translates to an income reduction of $509.

This implies that, in net present value terms, every percentage point reduction in the long run Chinese growth rate costs us $46.5b. Of course, our model shows corresponding falls in investment, employment, and exports of iron ore.

While recent sharemarket volatility has focussed attention on Australia's wealth prospects, this analysis highlights a significant long-term issue facing our economy.

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