China's slowdown and diversification of its economy away from Australian iron ore will have an impact on our economy, but experts disagree on what that will mean for local living standards.
China's economy grew in the third quarter at the slowest pace since early last year, as the country struggles to boost weak growth. On an annual basis, GDP rose 4.6 percent in the three months to the end of September, according to China's National Bureau of Statistics, below the target of around 5 percent.
With real estate oversupplied, the most notable impact for Australia is in the iron ore sector, as China's need for steel declines.
It comes as the International Monetary Fund cut Australia's economic forecasts, predicting growth of just 1.2 per cent in 2025, with headline inflation rising to 3.6 per cent as government support increases.
On the one hand, economists say Australia has become too dependent on China, so this slowdown will lead to a decline in Australian living standards, while others say China's impact may not be as bad as it is thought. I initially expected.
Independent economist Saul Eslake warns that China's need for Australian iron ore is declining today and will increase over time.
“By the early 2030s, China, like most advanced economies, will meet most of its steel needs by recycling scrap, something they are not doing currently because their use of steel is new,” he said.
“By the end of the decade, we will probably sell less iron ore to China at a much lower price.”
He also said Australia would not be able to replicate the success it had in the Chinese market elsewhere, because no other country would need iron ore at the same rate as China.
ASPI member David Oren largely agrees, warning that the impact of China's slowdown is already being felt in Australia.
“It's a chill Australia is likely to feel… as the impact of weak exports will be passed on to retirement income, the value of the Australian dollar and the cost of imported goods. “Living standards will be affected,” Oren wrote in an economic note.
Meanwhile, Matt Grudnoff, chief economist at the Australian Institute, said China will have a clear impact on GDP, but it won't affect living standards as much as people think.
“The impact is not as great as one might initially think. “The mining industry is not a big employer and most of the things it produces are profits and a large part of them are exported abroad,” Grudnov said.
How much has China contributed to the Australian economy?
There is no doubt that China's exports account for a significant portion of Australia's exports and have contributed to improving our living standards.
The Bankwest Curtin Economic Center (BCEC) estimates that Australian trade with China increased disposable income by an average of $2,600 per Australian household in the 2022-23 financial year, reaching $8,700 in some states.
“This is equivalent to 4.6 per cent of per capita disposable income and $29 billion in total for Australian households,” the report found.
The research finds a further 595,600 jobs in Australia are supported by trade with China, or 4.24 per cent of our total employment.
Much of this is due to the mining sector, which makes up 14.3 per cent of Australia's economic makeup, according to the Reserve Bank of Australia. China, as Australia's largest trading partner, accounts for about 33 per cent of Australia's net trade.
“Exports to China make up about 7 per cent of Australia's GDP so it's very important to us and we benefit from things that are driving iron ore and coal in particular,” Eslick said.
Grodnov said the mining sector was actually less important than Australians thought.
“Of all the industries in Australia, GDP does a particularly poor job of showing the economic impacts on Australia.
This is because GDP is made up of all the wages paid by the mining sector and all the profits it makes, but it does not take into account where the money ends up.
“So while Australians typically earn salaries in Australia, they are therefore spent in Australia. Approximately 80% of profits in the mining sector are foreign owned, meaning that 80% of GDP flows solely to foreign owners.
What should we do before 2030?
Economists agree Australia needs to diversify its trade to offset any risks from China.
“It is bad to depend too much on any industry or country. If you go to an investment advisor they will tell you to diversify and the same applies to a country.
Although Grudnov said China may not have the influence over Australia as previously expected.
“When China imposed these tariffs on Australia, they didn't really have much of an impact, which partly explains why China walked away from them.
“There was just a realignment of trade. Once everything settled down, the impact fell mainly on China as it had to outperform other suppliers.
Eslick said Australia had been “extremely fortunate” as it had gone 30 years without a recession and many important structural reforms emerged from times of struggle.
The economist said Australia needed to increase its productivity or seek to diversify its customers, although he noted there was only one country like China.
“All Southeast Asian countries are equivalent to 700 million people, and there are certainly opportunities in Indonesia, the Philippines, Vietnam and Thailand that Australian businesses should look to collaborate with to reduce our dependence on China,” he said.
“But none of these countries will give us the power that China has enjoyed over the past three decades.
“All of this highlights the challenges we will face without the tailwind that the Chinese economy has given us and why we must focus on productivity growth,” he said.
He said Australia was primarily a quarry that only sold raw materials but had to add value because it was hard to get.
“If Australia wants to protect itself from dependence on another country, moving up the value chain would be the best way to do it.”
