The Australian market could see sharp house price declines and lower gross domestic product (GDP) in the event of a slowdown in the Chinese economy caused by the US/China trade war, according to a report by Fitch.
The ratings agency modelled a scenario where a Chinese economic slowdown was caused by the US imposed an additional 25 per cent in tariffs on around US$300 billion of Chinese goods. It was then amplified by a separate investment shock involving a substantial retrenchment in investment activity against the backdrop of corporates' need to ease balance-sheet pressure and preserve liquidity amid weaker demand.
In the event of this occurring, Fitch said, Chinese GDP would trough at 3.4 per cent in 2020, compared with expectations of 5.9 per cent GDP.
This could then have a knock-on effect on nearby markets such as Hong Kong and Australia.
“A severe China slowdown could undermine housing market sentiment and exacerbate home price corrections in markets where affordability is most stretched, most notably Hong Kong and Australia,” it said.
“Sharp home price declines would amplify the impact on household spending and construction activity and could undermine performance in banks’ mortgage portfolios.”
Fitch said it could have even ‘underestimated’ the possible impact of a Chinese GDP slowdown on Australia due to the volume of commodities traded between the two countries.
“The nature of Australia’s exports to China – predominately commodities that are sensitive to slower resource-intensive Chinese investment – could mean that our model underestimates the impact.
“The Reserve Bank of Australia recently calculated that Chinese GDP growth slowing to around two per cent could lower Australian GDP by up to a cumulative 2.5 percentage points over three years from the baseline, compared with 1.1 percentage points in our scenario.”