A hard landing in China could hurt Australian jobs, business confidence and trigger a 25% house price fall: Standard & Poor's

Stephen TaylorDecember 7, 2020

A ‘’severe slowdown’’ in China’s economy would likely have a pronounced impact on Australia, with banks hit by one-or-two notch downgrades in their credit ratings, jobs being lost and house prices tumbling.

That's Standard & Poor’s rating agency latest analysis.

They speculate what might unravel in a worst-case scenario, a ‘hard landing’ in China which would then stifle economic growth here by hurting jobs, damaging business confidence and causing house prices to fall by as much as 25%.

The agency says there is only a 5% probability of China suffering such a fate - which it defined as 5% gross domestic product growth or below, and which assumes "a major policy misstep, or policy inaction".

Standard & Poor’s rating agency analyst Craig Michaels says under the highly unlikely “hard landing” scenario, Chinese growth will decline to 5% causing Australia’s GDP to contract by 1%.

This will cause unemployment to surge to 10%, the cash rate to fall to only 0.5%, the exchange rate to dive to $US0.65 and the terms-of-trade to decline by 13%.

Under a ‘medium landing’ scenario (20% to 25% probability), in which Chinese growth slows to 6.8%, Australian house prices would potentially fall by 10%.

Under a ‘baseline scenario” (55% to 65% probability), with China slowing marginally to 7.3% it would cause minimal fluctuations here. House prices would flatline in Australia.

As a precaution, the ratings agency has factored in a ‘’moderate slowdown’’ in Chinese growth in its current credit ratings of Australian banks, saying slower GDP growth in China this year and next "will not have a material impact on the credit metrics of the Australian financial institutions."

S&P says that, at worst, the credit ratings of the big banks would fall, but only from AA- to A+, taking into account clear-cut government support for them. However, it says smaller banks could expect a ratings downgrade of two notches, dragging some below investment-grade status.

S&P argues that "a soft slowdown in China would likely have a no-to-low impact on Australian financial institution ratings, with few, if any, rating downgrades on Australian financial institutions’’.

A medium slowdown in China "would also likely have a low impact on Australian financial institution ratings’’, S&P says.

It's not the first time S & P has done its sums with worst case scenarios that have yet to come close to occuring.

 



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