IMF Stress Tests A China Slowdown

At MacroBusiness, what to expect for Australia (h/t Yves Smith):

Scenario two is a more severe a one year slowdown in Chinese growth arising from a real estate bust:

…we assume a decline in investment drives a slowdown in China, possibly because of problems in the real estate market or some financial market disturbances.
11. Australia suffers a terms of trade shock. The size of the impact, however, depends significantly on the degree of policy flexibility elsewhere.

• With limited policy flexibility elsewhere, Australia’s terms of trade falls by about 10 percent in the first year, relative to baseline. The impact of the fall in global commodity prices on the terms of trade is partly offset by a fall in the price of commodity imports, including oil. With full policy flexibility in advanced countries, the fall in Australia’s terms of trade would be cut by two-thirds.
• Real GDP falls by about ¾ percent relative to baseline, because of lower demand from China and the negative impact of the Chinese shock on global demand. However, with policy flexibility in advanced countries the fall would be less than ¼ percent. The reduction in commodity prices amplifies the negative impact on nominal incomes, with nominal GDP falling by 2½ percent in the case of limited policy flexibility (1½ percent with full policy flexibility).
• Government revenue in Australia falls directly, through a decline in resource taxes and company income taxes, and indirectly
• through lower economic activity. We assume public expenditure is reduced gradually to balance the budget. As a result, transitory deficits add to public net debt which rises by about 3 percentage points of GDP over two years.

12. A depreciation of the Australian dollar helps buffer the shock, as do cuts in the policy interest rate. The exchange rate depreciation redirects exports to non-commodities and reduces imports. The contribution of net exports to GDP growth in real terms improves. However, the depreciation is not strong enough to fully offset the impact of lower commodity prices on the nominal trade balance, which worsens by about 1½ percent of GDP. Because about half of private earnings from commodities accrue to foreign shareholders, the drop in the current account balance is smaller than the decline in the trade balance.