Aussie GDP slowdown — blip or trend? «
We’ve been fortunate in Australia, comfortably insulated from many of the aspects of the global financial crisis that have hampered growth across other developed economies.
Our GDP growth has been rampant, phenomenal, perhaps even meteoric — granted it took a wobble in 2009 as the repercussions of the crisis spread across borders, but the upward trajectory was quickly resumed, and it’s worth bearing in mind that last week’s figure is merely a slowing.
It’s far from being anything like a wholesale slide into recession.
But what happens next? This huge explosion in GDP has been built on rising resource prices and with consensus suggesting that the demand — the key driver for wealth into the country — is now slowing, is it sensible to believe that the good times will continue?
It’s easy to see the pessimistic viewpoint. Iron ore prices peaked at over US$180 per metric tonne in February 2011. It’s now trading below $90 and suggestions that we’ll see $50 by next year aren’t difficult to come by either.
The mining firms are reacting, too. Just last week, Fortescue /quotes/zigman/329628/realtime AU:FMG -0.53% shelved expansion plans to save $1.6 billion in capital expenditures for the current year, whilst BHP Billiton /quotes/zigman/270355/delayed/quotes/nls/bhp BHP +0.24% made similar moves in August.
And perhaps this is the most critical point — nervous industrial giants are getting cold feet about the outlook. Less infrastructure development means less money going back into the Australian economy. Employment suffers, tax receipts decline, and the rot of a downward spiral starts to take hold.
The decade of bumper growth has seen costs in Australia climb to dizzy heights, and the Aussie dollar is still sitting at levels that make many opportunities for export simply unattractive. What’s more, consumers are clamoring to spend their valuable currency overseas.
Against this backdrop, it’ll be no surprise to learn that the economy has been in deficit for the last seven months now as well. Granted we’re working hard with net exports of services and goods under merchanting seeing some growth, but it would be foolhardy in the extreme to consider for one minute that anything so labor intensive (and it’s expensive labor at that) can hope to offset the impact of specific resources falling in value by almost 75%.
Can the country rebalance its economy quick enough to prevent a recession — assuming that the forecasts for resources hold true then the risk has to be that this simply won’t be possible.
The central bank is reluctant to cut interest rates lest inflation jumps higher, so on this account, the Aussie dollar is going to remain a powerful proposition for some time yet — although as I wrote last month (Is there much more life left in this par(i)ty?), when parity does fail to hold, the unwinding could be quite dramatic.
But that’s all fine — re-skilling people to take advantage of the world after this latest bubble has fizzled out is fine — surely a government that has been presiding over such monumental growth has feathered the nest in fine fashion, ready to provide the stimulus, moving people from the mines to manufacturing.
Unfortunately, this starts to look increasingly like 1980s Britain and that didn’t turn out well. The U.K.’s transition to a service economy was slow, painful, required huge deregulation and didn’t have the education system in place to meet the needs of these new employers. The frightening illustration is perhaps that between 1980 and 1984, U.K. GDP fell around 20%.
Maybe the best we can hope for is that Australia learns from all these lessons — either that or we take the head in sand approach and wish for a prompt return to the halcyon days of iron ore back at $200/tonne!