Much is spoken about China and the impact a slowdown in growth, a hard landing, would have on our economy. This is a topic that naturally garners great interest as most would attribute Australia’s recent economic prosperity to China’s insatiable appetite for our resources. So does an end to the commodities boom mean an end to the good times in Australia?
Firstly, let’s put things in perspective. Economic growth in China has been running in excess of 10% for the past 5 years so it’s inevitable that growth will soften at some stage. However, a forecast growth rate of 7 – 8% is hardly a floundering economy.
China has many tools available to it too ensure that an excessive downturn doesn’t occur. Government debt is low, interest rates have plenty of room to move, bank capital ratio requirements remain high and the government has the ability to manipulate their currency. So for a country that is hell bent on improving the living standards of their people its hard to imagine they would tolerate a hard landing in their economy.
Consider this, the per capita income in China is around $6,000 compared to Australia around $60,000. That means China’s economy has to grow 10 times to get to the level of prosperity Australian’s take for granted meaning there is still huge potential for further catch up and hence urbanisation and industrialisation.
Finally, even though we believe the China growth story has more to play out at some stage the demand on our resources will wane. However, this won’t necessarily mean things are doomed for Australia. For the last few years the mining sector has been dragging us through tough economic times. Industries like tourism, retail, manufacturing and exports outside mining have been suffering largely due to the hindrance of a high Australian dollar inflated by the commodities boom.
These industries make up almost 80% of our economy with mining and resources making up the remaining 20%. So if we see an eventual unwinding of the commodities boom you would expect some pressure will come off the Australian dollar and these industries, the larger component of our economy, which have been struggling for the last few years will all of a sudden kick back to life and be the drivers of our economy going forward.
As always it is a pleasure to provide you with our insight and should any issues require further clarity please feel free to contact the office.