3.6 China's large impact to continue despite slowing growth and risks
A slowing in China's growth rate suggests that its impact on New Zealand will begin to lessen. However, as China now has a higher share of New Zealand trade, China's growth rate does not need to be as high as in the past to give the same contribution to New Zealand's growth. As it is expected that China's share of New Zealand exports will continue to grow, this means that its contribution to economic growth will continue to increase. If we assume that China's demand for New Zealand exports grows in line with China's GDP, then its contribution to New Zealand GDP can be expressed as China's GDP growth multiplied by its share of New Zealand exports multiplied by exports' share of New Zealand GDP.
Between 2000 and 2005 China's nominal GDP growth rate averaged around 12%, exports were around 31% of New Zealand's GDP and China accounted for 5% of exports. This suggests a direct contribution of 0.2 percentage points to nominal GDP growth from exports to China. With total exports 28% of New Zealand GDP and China accounting for 13% of total exports in 2012, China would only need to grow by around 5% to have the same contribution to New Zealand GDP as in 2000-2005. With China's nominal growth rate expected to be around 10% in the next few years, the expected contribution of gross exports to China to New Zealand nominal GDP growth would be around 0.4 percentage points, all else equal.[46] Osborn and Vehbi (2013) estimate the impact of China's growth on the New Zealand economy, including indirect effects via Australia, using the framework of an econometric model.
New Zealand and Australia both face risks associated with having a large share of product exports dependent on a single market such as China. A significant slowdown in growth, greater than the gradual slowing envisaged above, or any incidents which result in a disruption of trade, could have serious consequences in terms of lower export volumes and a fall in commodity prices simply because of the dependence on a single market.
The manufacturing sectors in Australia and New Zealand have been contracting as a share of the economy in recent years, partly owing to the competition from China which they cannot match, exacerbated by the high exchange rates. This is likely to continue in New Zealand as manufacturers find it difficult to compete with low-cost Chinese production, which will be supplanted by other low-cost producers such as Vietnam and India as costs rise in China. Niche-market producers are likely to remain successful, with setting up a manufacturing arm in China an option for others to take advantage of lower labour costs.
Notes
- [46]This is a standard methodology for quantifying spillovers; see for example Ahuja and Nabar (2012).
