China's Slump will Hurt Australian Incomes, and the Pain is Likely to Linger The Sydney Morning Herald 6 December 20 | 4 John Garnaut and Philip Wan Dong Tao, chief economist for the Asia region at Credit Suisse investment bank says the \"golden age" of endless infrastructure, housing, exports and govern- ment stimulus is over. "This is where people are too optimistic, believing that within one or two years things will be better.\" China's transition to a services-based and consumption-driven economy means that its appetite for commodities such as Australian iron ore is going to \"shrink dramatically\Economic Analysis 0 Figure | shows the impact of China's slower growth on its imports from AustraliamAustralia's exports to Chinawhich in the rst quarter of 20 | 5 were running at a quarterly rate of $7.5 billion lower than their peak at the end of 20l3. 0 Lower exports hit business prots and condence, which in turn bring a decrease in investment. ' Figure 2 shows that from a peak in mid20 | 3 to the end of 20 l 4, private investment fell by $3.3 billion per quarter. 0 Exports and investment are components of autonomous expenditure. And a decrease in autonomous expenditure decreases aggregate planned expenditure and shifts the AE curve downward. 0 Figure 3 illustrates expenditure equilibrium in two situations. 0 In Figure 3, the curve AEO shows what aggregate planned expenditure would have been in 20M with no decrease in exports to China and private investment. 0 Equilibrium real GDP would have been $420 billion (quarterly rate). 0 The curve AE. shows aggregate planned expenditure in 20|4 with the decrease in exports to China and private investment. AEI is $| l billion below AEO. 0 Equilibrium real GDP in 20|4 is $398 billion, which is $22 billion less than it would have been without the fall in exports and investment. 0 The expenditure multiplier in Figure 3 is 2: A decrease in autonomous expenditure of $| | billion decreases real GDP by $22 billion. Expres to China (billions of dollars per quarter) Aggregate planned expenditure 28 . (billions of dollars per quarter) 26 . . . . 440 + 24 - Equilibrium with 450 line no fall in exports 22 . . . . Exports to China and investment fall by $7.5 billion AEo . . . . . . . per quarter 420 18 A AE . . . . . . Mar 2013 Sep 2013 Mar 2014 Sep 2014 Mar 2015 Fall in exports Month/year and investment . . . Figure I Exports to China Investment (billions of dollars per quarter) 398 B 89 . . . . . . . Investment falls 88 by $3.3 billion . . . Equilibrium with per quarter 380 fall in exports 87 and investment . . . 86 . 85 . Mar 2013 Sep 2013 Mar 2014 Sep 2014 Mar 2015 0 380 398 420 440 Month/year Real GDP (billions of dollars per quarter) Figure 2 Private Investment Figure 3 Expenditure Equilibrium