Analysis: Australia’s Success Story Takes a Chilling Turn
Australia faces a gathering threat to its 21-year run of recession-free growth that will likely require the central bank to cut interest rates to record lows and keep them there for some time, if the winning streak is to stretch to 22.
The slowdown in China has deflated prices for Australia’s key resource exports while forcing miners to scale back on their most ambitious expansion plans. When the country reported its widest trade deficit in three years for August, it seemed just a taste of what was to come.
“It’s like we’re watching a slow motion train wreck,” said Su-Lin Ong, a senior economist at RBC Capital Markets.
“The decline in export earnings will take toll on wealth, incomes and consumption right across the economy,” she explained. “And it’s happening when fiscal policy is being tightened and the Australian dollar is restrictively high.”
As a result, she expected the economy’s strength would bleed away into 2013, leaving it dangerously exposed should a seven-year old boom in mining investment also top out that year.
The government and central bank still forecast growth of around 3 percent for the next couple of years.
But when the mining splurge turns, as it must, there will likely be significant quarterly falls in investment even as the level of spending stays high.
And since investment is set to reach a heady 9 percent of Australia’s A$1.5 trillion ($1.53 trillion) in annual gross domestic product (GDP), such falls could easily cause a couple of quarters of contraction, the textbook definition of recession.