A Chinese “hard landing” translating into 5 percent growth would tip Australia into recession and send unemployment skyrocketing to 10 percent, a Standard & Poor’s report warned yesterday.
Such a rapid deceleration in Australia’s major trading partner, rated as an “unlikely” scenario by S&P, could also see the mining-powered economy lose its triple-A credit rating, the agency said.
“Renewed uncertainty surrounding China’s economic outlook is casting a long shadow over Australia’s own economic prospects,” S&P said in a new report.
“The mining investment boom appears to have peaked, and Australia’s GDP growth is slowing. Meanwhile, China’s economy is also decelerating and concerns of a ‘hard landing’ have resurfaced,” it said.
S&P said its “base case” was for China’s expansion to moderate to 7.3 percent in the 2013 calendar year for the medium term, meaning 2.5 percent growth and 5.7 percent unemployment in Australia this year and 2.9 percent and 6 percent next year.
“We expect growth to be subdued in the near term, as mining investment peaks,” S&P said.
“Non-mining sectors are unlikely to fill the gap left by the mining sector anytime soon,” it said.
However, it also modeled a “medium landing” where China growth was 6.8 percent and a “hard” scenario where it grew just 5 percent, translating into GDP next year of 2.1 percent for Australia or a 1 percent contraction respectively. The latter could trigger a recession and credit downgrade, the agency said.
Under a medium scenario, rated at a 25 to 30 percent likelihood, unemployment would be 6.5 percent in Australia, and 10 percent were China to slow sharply.
Australian government data published yesterday showed unemployment was at 5.7 percent last month, unchanged from June, but the economy shed 10,200 jobs as a decade-long commodities investment boom peaks.
“Australia’s exposure to commodity demand from Asia, and China in particular, was a saving grace during the global recession of 2009. But by the same token it has become Australia’s Achilles’ heel,” the ratings giant said.
“Particularly while mining investment remains such a large share of the Australian economy, and other sectors continue to lack growth momentum, Australia remains highly sensitive to a sharp correction in China’s economic growth,” it said.
Australia’s central bank cut its official cash rate to an unprecedented 2.5 percent this week in a bid to boost the non-mining areas of the economy. The latest GDP data is due out on Sept. 4.
The ruling Labor party, led by Kevin Rudd, which is seeking re-election on September 7, downgraded its unemployment predictions for the 2013/14 financial year this month from 5.75 percent seen in the May budget to 6.25 percent.