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 producers are back at their Covid-19 lows – is it time to buy?
Oil

Oil producers are back at their Covid-19 lows – is it time to buy?

With demand for oil hammered by Covid-19 and talk of “peak oil demand”, there are lots of good reasons to be bearish on oil producers. So, asks John S…
22 Sep 2020
Jim Reid: an ”age of disorder” is looming
Global Economy

Jim Reid: an ”age of disorder” is looming

The world is headed for a new “age of disorder”, says Jim Reid, the veteran multi-asset strategist at Deutsche Bank, in the latest edition of his annu…
21 Sep 2020
The charts that matter: China’s recovery bolsters the yuan
Global Economy

The charts that matter: China’s recovery bolsters the yuan

China's strengthening currency is a sign of confidence in the country's economic recovery. John Stepek looks at the yuan chart, and all of the others …
19 Sep 2020
A “new deal” needn’t be green
UK Economy

A “new deal” needn’t be green

Britain is seeking measures to revive its Covid-ravaged economy. It should choose from a broader palette than just “green”, says Matthew Lynn.
13 Sep 2020

Most Popular

Oil producers are back at their Covid-19 lows – is it time to buy?
Oil

Oil producers are back at their Covid-19 lows – is it time to buy?

With demand for oil hammered by Covid-19 and talk of “peak oil demand”, there are lots of good reasons to be bearish on oil producers. So, asks John S…
22 Sep 2020
Why you should stuff your end-of-pandemic portfolio with Chinese stocks
China stockmarkets

Why you should stuff your end-of-pandemic portfolio with Chinese stocks

For an end-of-pandemic portfolio, you need assets that can cope with today’s volatility. And that, says Merryn Somerset Webb, means Chinese stocks.
14 Sep 2020
IAG's share price is ready for take-off - here's how to play it
Trading

IAG's share price is ready for take-off - here's how to play it

The owner of British Airways has had a turbulent year, but is now worth a punt. Matthew Partridge explains the best way to play it.
8 Sep 2020