International | Nov 29 2011
By Greg Peel
Commonwealth Bank economists have trimmed their 2012 global GDP growth forecast by 0.4 percentage points to 3.5% to reflect the coming recession in the eurozone, the mild slowdown in China and the subsequent impact on broader Asia.
CBA sees the coming eurozone recession as a “mild” one, which implies a GDP contraction of around 1.0%. By contrast, the eurozone saw its GDP contract by 5.6% in 2008-09. The eurozone impact on the world GDP forecast is only small given the region has only contributed a modest 15.3% of global growth in the past decade.
More influential is the Asian economy, which by contrast has contributed 56% of global growth over the last decade, CBA notes. Asia is clearly also more important for Australia, it is the destination for 75% of Australian merchandise exports. The eurozone is not of great importance to Australia on a trade basis, but CBA states the obvious in noting the ongoing financial risk of a global spillover from Europe's debt issues.
CBA has trimmed its 2012 GDP growth forecast for China to 8.7% from 9.0%. The change reflects not only lower expected exports but also an “orderly”decline in Chinese property prices of 10-20%. Despite nervousness to date, China's net house price has yet to peak, notes CBA, albeit price falls in the largest cities are an indicator of things to come. Yet even with 10-20% price falls, CBA suggests the greater influence of China's construction and manufacturing sectors on wealth generation means the negative contribution from falling property prices will only be small.
It would be a different story were China's prices to see much bigger falls, CBA concedes, but that's not what the economists are forecasting. They also offer nine reasons why an orderly decline of 10-20% in China is really nothing much for the rest of the world to fret over.
(1) The Chinese economy is undergoing a structural change which sees a shift from universal public housing towards ownership of private dwellings. Observers should not underestimate the impact of this structural upheaval on prices as opposed to what the West knows as property price cycles.
(2) China's residential mortgage loans are just 15% of GDP, compared to 70% for the US and 90% for Australia; and (3) the vast majority of China's housing boom has been financed out of savings rather than debt.
(4) Household consumption represents only 37% of China's GDP compared to 62% in Australia and 70% in the US. A fall in house prices thus implies a lower negative wealth effect on the economy in China; and (5) while it seems like China is undergoing a world-beating residential construction boom, residential construction only accounts for 6.0% in GDP which is the same in Australia.
(6) If the Chinese property market were to collapse, the response from Beijing would be swift. China's current cash rate is 6.56% so there's plenty of room to move.
(7) Does it seem like the Chinese property market is in a bubble? Since 2005 the net price increase for new homes has been 6.3%pa and for existing homes only 3.9%pa. The growth rate in the US, and in other Asian regions, had been much higher.
(8) Price-to-rent ratio growth suggests slight overvaluation, but not as much as is currently the case in Singapore, Hong Kong, France and Canada.
(9) While China's residential vacancy rate of 10% appears high (Australia 2.1%), this comes back to point (1) about the structural shift. As the Chinese move out of their old public housing complexes and into their own dwellings the government will be demolishing those old complexes in their wake.
To conclude, CBA notes that while falling housing affordability in large Chinese cities threatens significant social problems, a 10-20% nationwide decline in net house prices is not expected to deliver a large net impact on the Chinese economy.
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