China collapse fuelling $180 billion bloodbath as Australia's backbone threatened

China's slowdown will hit the Australian economy exactly when domestic conditions are already problematic (GDP growth is slow and unemployment is rising). It is important for Australians to realise China matters to us more than any other country.

One-third of all Australian exports go to China. Weakness in the volume of exports to China and the prices paid for those export items — like our iron ore cash cow — will impact the performance of many companies and the economy more generally.

Mining has been heralded as Australia's economic backbone: we cash in on tax and it offers lucrative jobs.

Even now the industry is grappling with what to do, with redundancies reported in Western Australia on Thursday.

China's downturn could help push interest rate cuts, but it could also cripple an industry that has supported the nation.

What might be interesting for some to learn is that unlike Australians burdened by high inflation, inflation in China is too low

This is why that matters.

$10 billion monthly shrinkage savages Australian bottom line

The most recent data shows Chinese GDP growth at 4.7 per cent, which is materially slower than a year ago and below what is generally considered to be China’s potential growth rate.

This weakness is unleashing deflation pressures – the annual change in the inflation rate has been hovering around zero since the middle of 2023.

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Data on business costs, the purchasing price index, shows price falls over the past two years as the economy weakens.

China’s central bank, the People’s Bank of China, has eased monetary policy as a result of these disconcerting trends and in an effort to push economic growth and inflation higher.

To date, the policy easings have yet to work and have been thwarted to a large extent by a disconcerting outlook for the global economy more generally,

Commodity prices have fallen sharply since the middle of the year, particularly for iron ore – Australia’s largest export item to China – and oil, which reflects weakness in global industrial production.

Since the peak in early May, the iron ore price has fallen 25 per cent to around US$91.50 a tonne while the price of West Texas Intermediate oil has fallen 27 per cent since April to around US$66 a barrel.

These are clear signs that inflation around the world will fall further, based squarely on slumping demand as growth weakens.

Already, this has impacted the Australian economy.

The international trade balance for goods has gone into sharp reversal.

During the bulk of 2022 and 2023, Australia was running international trade surpluses of around $10 to $15 billion per month with booming export values.

Simply put, Australia was exporting goods worth $10 billion more than we imported – per month.

Since April 2024, as the China slowdown has bitten, the monthly trade surplus has slumped to around $5 billion.

This $5 to $10 billion shrinkage in the trade surplus is now eating away at Australia’s national income, while the share price of the companies heavily dependent on trade with China have slumped and bottom line economic growth in Australia is weak.

Given the most recent trends in global growth and commodity prices, the trade surplus is set to shrink further and could easily swing into deficit within the next year.

How can Australia minimise fallout from China downturn?

Australian policymakers cannot, of course, force the Chinese economy to grow more rapidly.

But policymakers can act to insulate the domestic economy from this negative shock.

The debate over Reserve Bank of Australia (RBA) interest rate policy is as hot as ever.

However, further negativity from China will tilt the balance towards lower interest rates in Australia, just as it has around the rest of the industrialised world.

Easing monetary policy in the wake of falling income as export values slump will spark stronger growth in the domestic economy.

Of course, a range of other economic indicators will need to be seen before the RBA lowers interest rates.

Most notably inflation, unemployment and bottom line economic growth need to satisfy the RBA that interest rate cuts are necessary.

As these indicators are already showing, RBA interest rate cuts are moving closer — the Chinese economic slowdown and falling commodity prices might bring forward the timing of those rate cuts and indeed, the magnitude of those cuts.