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

Why there is still life in the energy bull market
Energy

Why there is still life in the energy bull market

A green power initiative on the Galapagos Islands demonstrates how the renewable energy transition will need to be supported by fossil fuels for some …
4 Nov 2022
The end of cheap money hits the markets
Stockmarkets

The end of cheap money hits the markets

Markets have swooned as central banks raise interest rates, leaving the era of cheap money behind.
28 Sep 2022
Investors are still in denial about inflation and interest rates
Global Economy

Investors are still in denial about inflation and interest rates

There are worrying signs that inflation is becoming embedded in the economy, but many investors are struggling to adjust to the new reality.
23 Sep 2022
Could gold be the basis for a new global currency?
Gold

Could gold be the basis for a new global currency?

Gold has always been the most reliable form of money. Now collaboration between China and Russia could lead to a new gold-backed means of exchange – g…
22 Sep 2022

Most Popular

Is it cheaper to leave the heating on low all day?
Personal finance

Is it cheaper to leave the heating on low all day?

The weather is getting colder and energy bills are rising, but is it really cheaper to leave the heating on low all day or should you only turn it on …
1 Dec 2022
Radiator vs electric heater – which is cheaper?
Personal finance

Radiator vs electric heater – which is cheaper?

We compare the costs, pros and cons of radiators and electric heaters and see which one will help keep your energy bill as low as possible.
28 Nov 2022
State pension errors – why tens of thousands of mothers could be missing out on millions in state pension payments
State pensions

State pension errors – why tens of thousands of mothers could be missing out on millions in state pension payments

LCP launches Mothers Missing Millions campaign amid DWP state pension errors.
3 Dec 2022