A hard landing in China could spark a recession in Australia this year, but aggressive rate cuts by the Reserve Bank of Australia and falls in the currency would drive a swift recovery, Oxford Economics says. 
Fears of a sharp slowdown in China's economy are overblown, say most investors, including Aviva's Euan Munro, but the risks cannot be discounted given Australia's reliance on the world's second-biggest economy, Oxford Economic's senior Asia economist Sian Fenner said. 
"China now accounts for around a third of Australia's merchandise exports and was responsible for an astounding 80 per cent of export growth between 2008 and 2014," Ms Fenner said.  
Oxford Economics' own forecast is for Chinese growth to slow gradually over five years. But in a hard landing scenario, labelled "unavoidable" by billionaire George Soros last month, and a theme attracting hedge fund investors, China's gross domestic product growth would slow to as little as 2.9 per cent this year.
The official figures for 2015 showed growth was 6.9 per cent, its slowest pace in 25 years.
This collapse would slash the price of Australia's key commodity iron ore by almost half $US23 a tonne, Ms Fenner said.

Australia vulnerable
Australia is particularly vulnerable because it was doubly exposed to weakening regional trade flows, hitting both export volumes and prices. 
Ms Fenner said this would send the terms of trade falling, and blowing out the fiscal deficit to a record-high 4.5 per cent or higher of GDP by 2017.
The gloomy assessment also forecasts the All Ordinaries index to shed another 15 per cent, or 850 points, exacerbating the falls experienced so far this year. 
"As recent episodes have shown, fears of a global economic slowdown with China at its epicentre, have led to rising volatility and [have] caused investors to reduce their overall equity exposure," Ms Fenner said. 
Investors in Australian shares view the local sharemarket's fortunes as tied to China, she said. 
"CNY [yuan] weakening and fears of further depreciation at the start of 2016 have been key factors behind the slump in Australian stock markets so far this year, down around 10 per cent year-to-date."

$A influence
Helping offset some of this weakness would be the fall in the Australian dollar to US61&cent; or lower on the weak iron ore price, reflecting a drop of more than US10&cent; from now. 
But if the currency's recent behaviour is a guide, a large cut in the value of the yuan by the People's Bank of China could send the dollar to as low as US55&cent; by the fourth quarter of 2016.
Ms Fenner said the Reserve Bank of Australia would act with aggressive interest rate cuts of 1.75 per cent, to an unprecedented 0.25 per cent. 
The RBA said in the Statement on Monetary Policy this month that China was a key area of uncertainty in the economic outlook, but said authorities had "the scope" to respond if China's growth was weaker than expected.
"But any sharp slowing in economic activity or increase in financial stresses in China could spill over to other economies in the region and adversely affect commodity prices, including those that are important to Australia," the central bank said.   
Ms Fenner said if the RBA left rates at 2 per cent, the recession would stretch out over three quarters and GDP growth would slow to 0.6 per cent versus 1.1 per cent if interest rates were cut.