4 Conclusions
China's growth is expected to slow to a more sustainable pace in the next decade compared with the previous decade, but will remain strong relative to New Zealand's other trading partners. Economic growth is expected to slow as investment growth eases owing to a decline in returns on investment and China's exports reaching a limit with increasing global market shares. These developments are unlikely to be fully offset by faster consumption growth, although consumption is likely to slowly replace investment as the main driver of domestic demand in China. China's population growth is likely to start to slow in the mid-2020s and the working-age population will start to decline in the mid-2010s, leading to lower aggregate GDP growth. Population ageing is expected to lead to a lower saving rate and faster consumption growth, supporting rebalancing of the economy.
The slowing export and investment growth is likely to lead to lower growth in China's demand for hard commodities, although the ongoing processes of industrialisation and urbanisation will continue to support this demand. As a result of the switch in growth drivers, demand for soft commodities is likely to increase more than demand for hard commodities.
Dairy and meat consumption per capita generally grow as incomes increase. In particular, consumption of skim milk powder and cheese are expected to grow significantly in the next decade, keeping prices for these products high. China's large population means that any per capita consumption increase will have significant impacts of global markets. China's overall shortage as well as an uneven and inefficient allocation of water resources and suitable farm land per capita will limit the domestic supply response to growing demand. These factors, as well as concerns about the quality of domestically produced food, mean that imports will be relied upon to meet growing demand for soft commodities.
New Zealand is well placed to take advantage of this expansion in demand for soft commodities as it has the natural endowments of water and fertile soil, efficient production systems embodying advanced technology and ongoing investment in innovation, well-developed infrastructure (including quality assurance) and a reputable country of origin “brand”. New Zealand also has an advantage as the first advanced economy to sign a free trade agreement with China in 2008. Demand for dairy products has ample room to grow with currently low levels of consumption per capita, and evidence suggests that dairy consumption (and food imports) increase as incomes grow. Also, Chinese diets are becoming more westernised and urbanisation will continue.
China's growing share of New Zealand exports means that their contribution to economic growth will continue to increase, despite an expected slowdown in the Chinese economy. However, New Zealand faces risks associated with some major product exports heavily exposed to a single market such as China.
Overall, we expect that New Zealand will become increasingly integrated with developing Asia (particularly China) and Australia across a range of dimensions, but with trade being the most important. New Zealand should benefit from this closer integration with a fast-growing part of the world; demand for our products is expected to remain high and to result in resources being increasingly allocated to those activities, increasing national income and raising living standards.
