Is Australia’s luck running out?

Australia hasn’t endured a recession since 1991. Economic reforms made in the early 1980s have helped.

Meanwhile, seemingly endless demand from China for Australia’s resources – iron ore, copper and coal in particular – along with higher government spending, kept the economy above water during the global financial crisis. But now, Australia’s luck might be running out.

The unemployment rate jumped from 6% to 6.4% in July. That’s the highest level in more than a decade, and it’s happened in a very forgiving monetary environment – interest rates have been cut from 4.75% to 2.5% since late 2011.

There are several reasons why the economy seems to be struggling. For one, commodity exports have slowed as China’s politicians attempt to encourage consumption at the expense of commodity-intensive investment.

This year the price of Australia’s top export, iron ore, has slid by 30%, says Chris Watling of Longview Economics.

And while the mining sector has boomed in recent years, its success has undermined prospects for other industries, via a process often known as ‘Dutch disease’.

Booming mining exports drove the Aussie dollar to record highs – it gained more than 40% against the US dollar between early 2009 and 2012. It has since fallen back, but this strong currency hurt both tourism and manufacturing.

In fact, manufacturing output in Australia is now lower than it was back in 2002, says Matthew Klein on FT Alphaville. It will fall even further now that all of the country’s foreign carmakers, including Ford and Toyota, have been forced to up sticks due to the strong Australian currency.

It’s hard to see consumers taking up much slack. The absence of recession in the past two decades means they have not been forced to cut back, so now their debts stand at almost 140% of household income.

Meanwhile, the air is getting thinner and thinner for the country’s property market. It is one of the world’s most overvalued, reckons the OECD think tank – by 30% compared to household incomes, and 50% compared to rents.

Add it all up, and it seems likely that Australia has merely postponed, rather than avoided, a downturn. This suggests that the Aussie dollar still has further to fall against its American counterpart, says Watling.

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