Why China’s slowdown is bad news for SMEs

The news that Chinese economic growth has slowed dramatically has sent shockwaves through the Australian economy.

Even Prime Minister Kevin Rudd, who has understandably been trying his best to talk the economy up for the last six months, was moved to declare yesterday that the Chinese GDP figures indicated 2009 could be “one of the most troubled years of our age”.

But what impact will the Chinese slowdown have on Australia’s small and medium business owners? Is it just our big miners that will feel the pinch, or can entrepreneurs expect a battering too?

Time for a SmartCompany Q&A.

So China says its GDP growth was 6.8% in the December quarter. That doesn’t sound too bad to me, given the economists are saying Australia’s GDP went backwards during the December quarter.

It’s all relative. China’s economy was growing at 11.9% in the middle of 2007, but GDP grew by around 9% in 2008 (the lowest annual rate in nine years) and by just 6.8% in the last quarter of the year.

Now, it’s worth pointing out that many economists question the accuracy of data, but one thing is clear – China’s economy stalled almost immediately after the Beijing Olympics in August, and is still slowing.

So what is the impact on Australia?

China is our biggest trading partner and buys about $25 billion of Australian exports each year. Rudd says the slowdown will mean an immediate reduction in exports of about $5 billion.

But wouldn’t that be mainly coal and iron ore? Not much to worry about for SMEs, is there?

You’re right – while many SMEs export to China, commodity exports will be hit hardest. But the flow-on effects of a mining slowdown will be felt throughout the Australian economy.

Mines will close and mine workers will lose their jobs, leading to a further decrease in consumer spending, which will be felt very quickly by SMEs, particularly in already-struggling sectors such as retail and hospitality.

On top of that, falling mining exports will put a big hole in government tax revenues. That will force budget cuts across the board and many of those programs that help SMEs will be under the gun. We’re also likely to see more jobs lost in the public sector.

As we’ve been saying for some time, this is all about unemployment – the higher it goes, the uglier the slowdown in Australia will be. And as Rudd said yesterday, China’s slowdown is bad news for jobs.

Right, I can see why the politicians are so worried. So how do we get out of this?

Our fate is really in the hands of the Chinese Government, which is not a bad thing at all. The last thing the Chinese want is mass unemployment, which would lead to social unrest and political problems, so they are likely to pump billions into the economy to get it growing again.

Last year they unleashed a stimulus package worth $US885 billon; the next one is likely to be even bigger.

Let’s hope the spending works.

If it doesn’t, Australia’s recession could be longer and deeper than anyone had first thought.

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