China - the most important demand side factor

There is no doubt that demand side factors have been important in Australia in the last four years.

The main driver of the Australian economy recently has been the mining boom, caused by very strong exports to China. China has experienced nearly a decade of growth rates above 10% and that demanded a great deal of mineral resources.

Now the Chinese economy is growing more slowly. It's still growing, but now by only 7.2% a year. But that's still growth isn't it?

Chinese growth demanded a great deal from the mineral suppliers of the world and supply constraints meant that the prices of commodities rose quickly. Australia saw the Terms of Trade rise substantially and that made Australia a lot better off. The Mining Resources Boom.

Today most mineral producers have expanded capacity compared to just four years ago. Australia has developed mines, opened new ones and improved port and railway facilities to allow the export of more mineral resources. World supply has expanded.

But now Chinese growth is slowing and demand for mineral resources is moderating. Mineral prices are falling as the graph of the iron ore price shows.

This means a lower value of exports for Australia, and a falling Terms of Trade. Whatever way you look at it the demand side of the economy is weakening.

This means lower Exports and Investment (as the 'Age' article linked below shows a port development has been shelved) and so lower Aggregate Demand. The multiplier effect will cause National Income to fall further and this means fewer jobs.

Last year everyone thought the Terms of Trade (then at a record high) would feature in the exam. You would be very brave not to revise this topic for 2013.

The Age reports some consequences of lower Chinese growth here