The world economy still struggles to release itself from the shackles of recession. The US economy has had only a very small increase in growth and European economies still struggle with the sovereign debt issue. However, Australia continues to grow, largely as a result of the strong demand for its commodities from the number two economy in the world, China (see graph for Australian export destinations).
In the October 2010 edition of econoMAX (online magazine of Tutor2u) I discussed the boom in the Australian economy and the challenges that lay ahead – bottlenecks in the labour market and a need for huge investment in ageing infrastructure, and a widening of income disparities between states and sectors in the so-called two-speed economy. But what would be the impact on the Australian economy if China started to contract and their growth levels slowed? How dependent is Australia on China’s insatiable demand for commodities?
A recent IMF paper simulated the impact of a Chinese economic downturn and looked at three
1 A change in the export-led economy to one that more domestic consumption based;
2 A temporary slowdown caused by an over-inflated property market or financial distress;
3 A recession in leading developed countries
Although the Australian economy will be affected by a downturn in the Chinese economy it does have the policy instruments (monetary and fiscal policy) available to be able to stimulate growth and return the economy to the positive slope of the business cycle.
The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.