Luck runs out for Australia

The fallout from the global economic crisis looks to be finally catching up on Australia.

Australia was one of the very few economies not to suffer a recession during the global financial crisis. The so-called lucky country' lived up to its nickname by hitching a ride on China's credit bubble, which greatly boosted demand for Australia's key metals exports.

But with China's slowdown, "Australia's luck is changing", says Lex in the FT. The prices of the main raw materials that Australia exports have slid and, with less money coming into the country, "the halo effect on the rest of the economy is dimming".

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But as the impetus from commodities fades, what can replace it? The commodities boom drove the Australian dollar, or Aussie, up to record highs, hampering tourism and manufacturing. The latter's capital expenditure has flatlined in recent years.

Meanwhile, consumers aren't in very good shape either. Unemployment has crept up for the past two years, and now stands at 6.1%. Wages are falling in inflation-adjusted terms.

Household debt kept climbing during the global downturn and has hit an eye-watering 180% of disposable income. In the US and UK, by contrast, it has fallen to 150% and 110% respectively.

The central bank is mulling over measures to cool the perennially overheated housing market, which is also likely to temper consumers' inclination to splash out.

All this means that growth will remain tepid for now; Bank of America Merrill Lynch is pencilling in a 2.4% rise in GDP this year and 2.6% next. With the economic backdrop lacklustre and interest rates unlikely to rise anytime soon, the Aussie is heading for further falls.

Morgan Stanley expects a drop of another 12% against the US dollar, implying a level of $0.76 by the end of next year.




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