A Chinese economic slowdown will hit Australia as iron ore prices tumble, the World Bank says.
The bank noted that Australia’s growth pace had deteriorated sharply since the first quarter of 2014 as declining prices for key export commodities depressed mining investment and weakened the Australian dollar, AAP reported.
It predicted that a further slowdown in China, Australia’s biggest trading partner, would affect Australia and its neighbors.
“The significant negative impact on Australia and New Zealand, among the world’s largest commodity suppliers, would lead to indirect spillovers on the Pacific Island countries, given their tight links through trade, investment and aid,” the World Bank’s East Asia and Pacific Economic Update predicted.
China’s growth pace in 2014 was the weakest since 1990 but the World Bank says things are set to get worse – just a month after the Chinese government cut its growth target to seven percent.
Chinese growth would ease from 7.4 percent in 2014, to 7.1 percent in 2015, 7 percent in 2016 and 6.9 percent in 2017.
China is a major buyer of Australian iron ore, which is used to make steel.
“In China, as it shifts to a consumption-led, rather than an investment-led, growth model, the main challenge is to implement reforms that will ensure sustainable growth in the long run,” the World Bank said.
Revenue to Fall
Australia expects the plunging price of iron ore – its biggest export – to reduce revenue forecasts by A$25b ($19b) over the next four years, Treasurer Joe Hockey has said.
He told the Australian Financial Review (AFR) that his May budget would be based on the anticipated price of iron ore falling further, to $35 a ton.
Iron ore is currently trading at $47 a ton – down from $120 a ton in 2013. The drop has been blamed partly on falling demand in China.
The estimated price of $35 a ton is even lower than the conservative forecast from December’s budget update, which assumed prices would fall to $60 a ton.
“There seems to be no floor, we are contemplating as low as $35 a ton,” Hockey told the AFR.
He said every fall of $10 in the price of the ore cost the Australian economy A$2.5b in revenue. Hockey is due to present his budget on 12 May.
He told the AFR the budget would contain “a credible path back to surplus” but refused to say when a surplus may be achieved.
He also could not guarantee that the deficit may not worsen again.
He said the government would have to continue pursuing structural savings, which have included unpopular cuts to health and welfare budgets.
