More than half a million Australians could lose their jobs if China’s economy abruptly slows, and the economy could take a $140 billion hit.
Modelling performed by Deloitte and published in a report released today by PWC chief economist Jeremy Thorpe has warned of the substantial impacts China’s economy has on Australia and Australian workers.
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“The People’s Republic of China [PRC] is the country’s largest trading partner, accounting for nearly a third of all exports,” Thorpe said in research he will present to the China Matters Forum today.
“While Australia has benefitted from the growth of the PRC economy, it also leaves us relatively more vulnerable in the event of a downturn. Thus, Australia will not be able to avoid economic disruption in the event of a PRC hard landing.”
A Chinese ‘hard landing’ would generally be considered a situation where the Asian country’s GDP growth falls from three to five percentage points. It’s currently sitting at 6 per cent.
And, such a plummet could be triggered by an escalation in the protracted trade war China is engaged in with the United States.
Alternatively, a US recession could also trigger such a fall, as could a Chinese property market correction, political disruption - like that unfolding in Hong Kong - and a breakdown of the Chinese banking systems.
China has proven capable of addressing individual risks, Thorpe said, but if more than one of these dangers are realised at the same time, the likelihood of a hard landing increases.
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“The impact of a PRC economic downturn will depend on the severity and the duration of a hard landing,” Thorpe said.
“However, the policy response in Australia and the ability of our businesses to adjust will shape the nature and magnitude of the effect on Australia.”
While Deloitte’s modelling uses a scenario where PRC growth falls from 6.5 per cent to under 3 per cent, triggering a loss to Australia’s national income of 7 per cent and 550,000 jobs, other analyses are less bleak.
The International Monetary Fund suggests a four percentage point drop in China’s GDP would wipe a smaller 0.4 per cent off Australia’s short-term growth.
What Thorpe predicts will happen in the case of a Chinese hard landing is that Australia’s export market will be hard hit, and the Aussie dollar will fall against the US dollar. However, education and tourism industries would likely welcome the fall in the dollar.
Consumer goods would also increase in price, but would unlikely have a major impact on the economy as inflation is currently sitting below the target benchmark.
However, commodity values will fall as PRC demand lessens, triggering mine closures and subsequent job losses in parts of regional Australia.
Surprising upsides of a Chinese hard landing
In the medium turn, Chinese efforts to stimulate the economy - including mass infrastructure projects - would likely outweigh any short-term challenges in Australia’s commodities industry.
And, Australia’s universities could stand to gain significant investment from Chinese students, now lured by a cheaper studying prospect.
“As long as the PRC Government does not seek to reign in its students studying abroad, we may see Australia attract a new cohort of price-sensitive PRC students shifting from higher cost markets or coming to Australia as the cost of education falls,” Thorpe said.
Josh Frydenberg may need to say goodbye to his promised surplus
Treasurer Josh Frydenberg in April announced he would deliver a budget surplus.
However, in order for Australia to ride out any economic downturn, the government will need to be prepared to sacrifice that surplus.
Funds will need to be provided to deliver stimulus and to cover increased welfare payments as unemployment surges.
“In the event of a hard landing the Australian Government should be prepared to sacrifice projections of the Budget returning to surplus given likely tax revenue shocks and the need to increase spending to stimulate the economy,” Thorpe said.
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