Sharper China slowdown risks blunting Australian growth

A sharper-than-expected slowdown in China would hit commodity-producing trade partners such as Australia hard, modelling by a major international organisation shows.

In the Organisation for Economic Co-operation and Development’s latest set of economic forecasts, the troubled Chinese economy was flagged as a key risk factor.

Weak consumer confidence and ongoing problems in the property market have been weighing on the world’s second-largest economy, with the 5.1 per cent growth expected for 2023 likely to ease to 4.6 per cent in 2024.

While not expected, the OECD modelled the impact of a sharper decline in the major economy.

A one-year decline of three percentage points in China’s domestic demand growth could wipe 0.6 percentage points off global growth numbers.

Output in commodity-producing economies, such as Australia, would be “relatively hard-hit, reflecting their comparatively strong trade links with China,” the report said.

The impact on the global economy would be much more severe if paired with tighter global financial conditions.

Other risks to the near-term outlook for the global economy included further shocks to global commodity prices, with food inflation a concern in an El Nino weather pattern.

Interest rates may also prove too effective – triggering deep slowdown and higher than necessary unemployment – or not effective enough.

A failure to bring inflation down fast enough would lead to higher interest rates for longer.

Under the OECD’s base case, the global economy is expected to grow by an insipid three per cent in 2023 and 2.7 per cent in 2024.

Economies were starting to respond to higher interest rates, according to the report, with business and consumer confidence taking a hit.

Inflation was responding to higher interest rates and coming down in most nations, although core inflation was proving stubborn in most places – including Australia.

The OECD had Australia’s growth prospects largely unchanged in its updated forecasts for September.

The nation’s economy is expected to grow 1.8 per cent in 2023, before slowing to 1.3 per cent in 2024.

Treasurer Jim Chalmers said the report showed the global economy was an “unpredictable place”.

Dr Chalmers said Australia was entering the inevitable period of uncertainty from a strong position.

“We have a strong labour market, wages are getting moving again and we continue to get good prices for what we sell to the world,” he said.

Poppy Johnston
(Australian Associated Press)