In April, China’s Services Purchasing Managers’ Index (PMI) tanked to 50.7. That represents a huge drop from April’s reading of 51.9. This drastic drop is a huge miss of expectations, as market consensus was predicting a much smaller drop to 51.7. The drop in the PMI is worrying many about the state of China’s economy. This scenario would have serious repercussions for its trading partners, not least Australia.
The full Services PMI is one of the most dynamic indicators of economic activity in the services sector. This sector therefore becomes an important driver of China’s aggregate growth. A reading greater than 50 means expansion, and any reading under that mark points to a contraction. As the newest numbers indicate, that’s changing fast. This slowdown risks reducing demand for Australian exports, which would pose an acute risk given that China is Australia’s largest trading partner.
Implications for the Australian Dollar
The economic well-being for one, and the Australian economy in particular, is deeply connected to the strength of the AUD (Australian Dollar). When China’s economy is booming, that means it is likely to buy more raw materials, goods and services from Australia. This increase in demand usually ends up strengthening the AUD, raising its value relative to other available currencies. Conversely, when China’s economic growth falters or does not meet expectations, as indicated by the recent PMI drop, the demand for Australian exports may decrease, leading to a potential decline in the AUD’s value.
According to some analysts, the recent PMI data is likely to reverberate in the foreign exchange market. Given that China’s economy often surprises with its growth data, any unexpected downturn can significantly impact the AUD and its trading pairs. Traders and investors will likely be monitoring these developments closely, as they may need to adjust their strategies based on China’s economic indicators.
Australia’s Economic Dependency on China
Given its strong mineral and fertile land endowments, in many ways Australia’s economy is the poster-child of a resource-revenue reliant economic structure. Exporting its $156 billion annual economy’s largest export, iron ore, helps drive the country’s sustained 3 percent economic growth. China is the world’s largest iron ore consumer – buying more than 60 percent of all seaborne iron ore. Any change in its purchasing behavior will have a dollar-for-dollar effect on Australia’s trade balance and broader economic performance.
Australia has a highly diversified export basket that goes beyond iron ore’s strong performance. These exports are largely driven by the demand for raw materials from China. At the same time, whenever China’s economy does well, it helps lift the demand—and iron ore prices—for other Australian products. The recent drop in the Services PMI is a troubling sign for future demand coming from China. The magnitude of this shift would be highly material to positively influencing Australia’s balance of trade.
Inflation rates in Australia greatly influence the value of AUD. When inflation goes too high for comfort, it translates into higher prices for American consumers and businesses. A higher inflation rate may prompt the Reserve Bank of Australia to consider adjusting interest rates, which could further impact the AUD’s strength.
Future Outlook for Australia-China Trade Relations
The Australia–China relationship will continue to be central to Australia’s economic future. While Australia’s resource wealth positions it favorably as a trading partner, fluctuations in China’s economic performance will continue to influence this dynamic. Analysts are keenly aware that any substantial changes in China’s growth trajectory could ripple through Australia’s economy.
Australia is looking to more than double its value of exports in a highly competitive global economic environment. To do that, smart policies are going to be key. Improving trade relations with other countries will better position us to avoid the dangers of being overly reliant on China. The bad news is that any such strategies would take time to even put in place.