China’s property market downturn has played out largely as UBS economists has expected.
But they also believe that the “adjustment is only halfway through” and will “still drop 10-15% this year”.
That continued fall in “Chinese (property) demand has a disproportionately large impact, and remains a downside risk” for the Australian economy, according to UBS Australia economists George Tharenou and Scott Haslem.
That’s because even though China’s share of total exports has fallen from one-third of all exports last year (7% of GDP) to 28% this year, it remains our largest export market, Tharenou and Haslem say. That means that Chinese GDP has become an important driver of Australian nominal GDP over the years.
“Hence, the expected ongoing moderation in China remains a headwind for Australia,” UBS says.
Here’s why Tharenou and Haslem say Chinese property is important to Australia:
the weakness in Chinese property to date had the most obvious negative impact specifically on Australia because our basket of exports is (almost) uniquely concentrated in commodities (back down to ~⅔ share), where Chinese demand is generally the marginal price-setter.1 Indeed, after iron ore alone reached a 30% share of total Australian exports in 2013, the recent renewed collapse in iron ore prices saw its export share drop back closer to 20%. The price effect has been a key driver behind Australia’s terms of trade collapsing by ⅓ since its peak in 2011, which is also dragging down business investment
The bad news, and continued negative feedback into the economy, is that the income shock from this “is weighing heavily on Australia’s fiscal position, seeing deficits consistently worse than expected in recent years”.
While the “sharply lower” prices recieved for Australia’s commodity basket has led to the “capex cliff” which Tahraneou and Haslem say is “recessionary”, which has seen the RBA cut interest rates, and consequently dragged down the AUD/USD to a 6-year low.
That could “directly subtract a massive 2%pts y/y from nominal GDP” and is “a downside risk for the economy – given it would require an unprecedented offset from the rest of the economy to reach our total GDP forecast for 2½% in FY16,” Tharenou and Haslem say.
That’s the economic transition the RBA is trying to manage with lower rates and a lower Aussie dollar.