Policymakers and investors are cautiously optimistic about Australia’s economic prospects, although a deteriorating China outlook continues to pose challenges for the world’s twelfth-largest economy. Australia’s gross domestic product (GDP) – the value of all goods ands services produced in the economy – defied expectations in the latter half of 2015, growing at a seasonally adjusted 0.9% in the third quarter. In year-over-year terms, Australia’s GDP expanded 2.5% in the third quarter, double the rate of comparable economies such as Canada and higher than the OECD average.[1]

The China Wildcard

China’s economic rebalancing away from investment and exports toward consumption and services has direct consequences for Australia. China is not only Australia’s largest trading partner,[2] but a key player in the global commodity markets. Therefore, it’s difficult to divorce the two countries when examining Australia’s future. China’s economy grew 6.9% in 2015, the slowest rate of expansion in 25 years and just below Beijing’s official target of 7%.[3] What’s more, Chinese growth is forecast to slow significantly over the next two years, averaging 6.3% in 2016 and just 6% in 2017, according to the International Monetary Fund’s January World Economic Outlook report.[4]

“The outlook for China continues to be a key source of uncertainty” for the Australian economy, the Reserve Bank of Australia said in its quarterly economic snapshot in February.

“The recent bout of global financial market volatility has been characterised in part by concerns about the evolving balance of risks in China and the ability of Chinese authorities to manage a challenging economic transition,” the Bank added.[5]

China has been at the centre of growing financial instability since last summer. Stock market volatility came to a head in the first week of 2016 after a massive selloff triggered China’s circuit breaker on two separate occasions, which forced an early shutdown of trading activity.[6] This not only sparked global financial chaos, but undid months of regulatory efforts to stabilize the country’s financial markets. Australia’s stock markets took a beating as a result, with the S&P/ASX 200 plunging 8.6% in the first three weeks of the month.