Analysis

Is the Australian economy weakening?

Tighter monetary policy is weighing on several parts of the Australian economy, but commodities is providing some respite. Alex Rankine reports.

“So much for the soft landing... It’s now a painful thud,” says Elizabeth Knight in The Sydney Morning Herald. Australian house prices fell by 1.3% in July, says CoreLogic. In Sydney they tumbled 2.2% for the month and are down 5.2% from their January apex: the local market is “plummeting” at its “fastest pace in 40 years”.

The cause is rising interest rates. Having started tightening monetary policy “too late”, the Reserve Bank of Australia (RBA), the central bank, is playing “catchup” at “warp speed”.

Tighter monetary policy has weighed on the stockmarket, with the benchmark S&P/ ASX 200 index down 7.5% since the start of the year. Still, that is better than many other developed markets, reflecting a heavy weighting towards commodities, which account for more than a fifth of the MSCI Australia index.

Australia’s central bank hiked interest rates by 0.5% to 1.85% at the start of August. That marks “an eye-watering 175 basis points of hikes since May”, says Wayne Cole on Reuters. With “unemployment at 48-year lows” the central bank thinks the economy can take the pain.

The RBA shouldn’t be too sanguine, says Swati Pandey on Bloomberg. The household debt-to-income ratio has reached an all-time high of 187%. Higher mortgage rates will eat into household budgets while a steep downturn in the country’s A$10trn (£5.8trn) housing market would further rattle consumers. 

Commodities offer cheer

While inflation is running at an annual pace of 6.1%, a 21-year high, Australia is one of the few wealthy countries that benefit when commodity prices soar. The country’s trade surplus hit a record high of A$17.7bn in June. “Earnings from metals jumped 27% in June while cereal and grains climbed 21.1%,” says Pandey. Strong demand for iron ore and coal has seen Australia enjoy trade surpluses every month since 2018.

Trade should provide a sizeable 1% boost to second-quarter GDP growth figures, says Marcel Thieliant of Capital Economics. Around three-quarters of Australian exports are “what can be broadly defined as commodities”, says Stephen Koukoulas for Yahoo Finance. The country is a major global supplier of iron ore, liquefied natural gas (LNG), coal, gold, “meat and grains”. The trouble is that this reliance leaves Australia exposed to volatile commodity markets.

Australia ranks 91st out of 133 countries in the Atlas of Economic Complexity , “just below Kenya”, says Brandon How on InnovationAus. This data, published by the Harvard Kennedy School of Government, measures “the number and complexity of the products” a country exports. Japan is top, while the UK is in tenth place. Australia’s commodity focus leaves it notably “less complex than expected for its income level”.

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