Is Australia’s luck running out?

Australia hasn’t endured a recession since 1991. But that could soon be about to change.

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.

Recommended

Oil shortage starts to curb demand
Oil

Oil shortage starts to curb demand

The price of Brent crude oil is up by 475% since its March 2020 low. And when oil prices rise, people start to reduce consumption, leading to increas…
30 Jun 2022
Metals prices wobble on slowdown fears
Industrial metals

Metals prices wobble on slowdown fears

The S&P GSCI index of 24 major raw materials has fallen back 9% since mid-June on growing fears of a recession, and copper has hit a 16-month low aft…
30 Jun 2022
Governments will sink in a world drowning in debt
Global Economy

Governments will sink in a world drowning in debt

Rising interest rates and soaring inflation will leave many governments with unsustainable debts. Get set for a wave of sovereign defaults, says Jonat…
23 Jun 2022
The MoneyWeek Podcast with Dylan Grice
Investment strategy

The MoneyWeek Podcast with Dylan Grice

Merryn talks to Dylan Grice of Calderwood Capital about how central bankers are the problem, not the solution; how bitcoin can counter the increasing …
23 Jun 2022

Most Popular

Prepare your portfolio for recession
Investment strategy

Prepare your portfolio for recession

A recession is looking increasingly likely. Add in a bear market and soaring inflation, and things are going to get very complicated for investors, sa…
27 Jun 2022
Market crash: have we hit bottom or is there worse to come?
Stockmarkets

Market crash: have we hit bottom or is there worse to come?

For a little while, markets looked like they were about to embark on a full-on crash. And that could still happen, says Dominic Frisby. Today, he look…
27 Jun 2022
What the end of the 1970s bear market can teach today’s investors
Stockmarkets

What the end of the 1970s bear market can teach today’s investors

The 1970s saw the worst bear market Britain has ever seen, with stocks tumbling 70%. Things have changed a lot since then, says Max King. But there ar…
28 Jun 2022