3.5 China's indirect impact via Australia
Australia's strong economic performance, partly as a result of China's powerful growth and consequent demand for hard commodities, has had indirect benefits for New Zealand as Australia is New Zealand's largest trading partner and the two economies are closely integrated. Some of the boost in incomes Australian exporters have received from their surging terms of trade has spilled over into the New Zealand economy. New Zealand merchandise exports to Australia have grown 55% since the mining boom began in Australia in 2005, helping it remain New Zealand's largest trading partner (Figure 1.1).
In an IMF working paper about the spillovers to Australia and New Zealand from emerging Asia, Sun (2011) found that the major benefit New Zealand has received from this region came indirectly through Australia. Using a vector autoregressive (VAR) approach, Sun found that a 1% shock to Australian quarterly GDP between 2000 and 2010 has almost a one-to-one effect on New Zealand. This relationship is much stronger over this period than for the period from 1991 to 2010, indicating that Australia has become more important to the New Zealand economy in the past decade.
Over the same period, emerging Asia has become more important to the Australian economy, with a 1% shock to emerging Asian GDP having a 0.3% impact on Australian GDP, according to Sun (2011). This suggests that over the past decade New Zealand has received indirect benefits from emerging Asia (mainly China) through Australia. On the other hand, emerging Asian shocks are found to have a statistically insignificant direct impact on New Zealand, although this could be because exports to China have accelerated rapidly only since 2008 and New Zealand has significant exposure only to China and not the rest of emerging Asia. No other emerging Asian economies are in New Zealand's top five trading partners, whereas India and South Korea are in Australia's top five trading partners.
The accompanying paper (Osborn and Vehbi, 2013) estimates the growth spillovers from China to New Zealand, including indirect spillovers via Australia, using an econometric model.
