Australian house prices will fall 9 percent if China downturn occurs: Deloitte

A downturn in China would trigger a recession in Australia, modelling by consulting firm Deloitte Access Economics shows. 

House prices would fall by 9 percent, in the “China sneezes, Australia catches pneumonia” scenario.

Although the Reserve Bank would respond by cutting rates and, when rates reached zero, by pumping liquidity into the market, Deloitte warns that global financial markets may become more ­reluctant to finance Australia’s deficits and may push rates higher.

Deloitte partner Chris Richardson says that while a Chinese downturn is not his central forecast, its elevated debts and reliance on government stimulus spending to keep growth going means that it is a plausible risk, particularly given global tensions over trade.

“Compared with the global ­financial crisis, Australia’s vulnerabilities are higher, our defences are weaker, and this time around China would be a cause of the problem rather than a part of the solution,” Mr Richardson says, in an advance copy of a speech to be delivered to the National Press Club today, and reported by The Australian.

The Deloitte modelling is based on a scenario in which China’s growth rate slows from the 6.5 percent targeted this year to less than 3 percent.

Mr Richardson notes that ­Australia’s dependence on China is greater than with any other country.

Employment would contract by 500,000, with half those numbers formally joining the unemployed and the remainder exiting the labour force.

The construction industry would account for more than a third of the 500,000 jobs lost across the economy and would contract by 25 percent. 

Deloitte says a downturn in China is only one scenario, with it also being possible that China and Asia more generally may sustain the growth that has supported Australia’s extended run of growth since the 1990-91 recession.

Queensland would be among the hardest hit regions in Australia from a severe slowdown in China.

Deloitte says the slowdown in China’s economy since 2011 had already taken a toll, Deloitte Queensland managing partner John Greig said.

The scenario of China stumbling is one of the three potential scenarios detailed in major consultancy Deloitte’s latest “Building the Lucky Country” series report.

The report says that “none of these three scenarios is the ‘most likely’ outcome for Australia. But they’re all plausible”.

The report says that Australia’s gains from our relationship with China have been huge, but there is a flip side in that Australia has increased its dependence on China.

“Australia doesn’t have the defences we had back in 2008 and 2009 — we lack firepower in interest rates and the Budget,” report author Chris Richardson said.