Australia’s economy bounces back

Australia’s economy endured its first recession in 29 years in the first half of 2020. But things are now looking up.

Prolonged lockdowns, a trade war and the first recession in a generation have made 2020 an uncharacteristically gloomy year down under. Australia’s economy endured its first recession in 29 years in the first half. Yet things are looking up. A consumer-led rebound drove a 3.3% GDP gain in the third quarter, the biggest quarterly jump since 1976. Aggressive suppression of the virus and fiscal support mean that consumers’ sentiment is now at a ten-year high, says Swati Pandey for Reuters. 

A worsening diplomatic and trade dispute has sparked debate about Australia’s economic dependence on China. Beijing has slapped tariffs and other restrictions on Australian wine, wheat, barley, beef and lobster exports among others this year. This week brought media reports that Australian coal imports are now being heavily restricted by China. 

China needs iron ore

Over a third of Australian export dollars come from selling to China, note Rod Tyers and Yixiao Zhou on theconversation.com. While mineral exports make up just 1% of national income, they are an important economic foundation for local service industries and keep the Australian dollar strong. Tyers and Zhou estimate that a 95% reduction in Australia-China trade would lead to a 6% hit to GDP and a 14% reduction in real disposable income per capita as a weaker currency sent import prices soaring. For goods such as wine, coal and beef, Australia is selling into a “buyers’ market”, says Elizabeth Knight for The Sydney Morning Herald. China can switch international suppliers relatively easily. Yet there is one crucial exception: iron ore, which has conspicuously not been subject to Chinese trade restrictions. The steel-making ingredient is vital to the country’s infrastructure-led rebound, but supply problems in Brazil leave China with few other sources. 

Australia exports about A$80bn (£45bn)-worth of iron ore to China each year. The trade uncertainty has sent iron-ore prices soaring 60% over the past year, delivering a windfall to Australian miners and the taxman. That is “offsetting the economic punishment” that China is trying to “inflict on Australia” through tariffs. 

The buoyant iron-ore price has helped send the Australian dollar up to a two-year high. The benchmark S&P/ASX 200 stockmarket index remains marginally down this year, but has rallied by 45% since March. 

The index is heavily weighted towards commodities and bank stocks, with the latter enjoying strong gains of late on hopes of a vaccine-led rebound, says Shane Walton for ig.com. Macquarie Asset Management thinks the Aussie dollar has further room to rise as commodities enter a bull market. The bank also says local stocks should gain from a global upswing. If “vaccines work as claimed… ASX stocks could rise over 10% in 2021”. 

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