Grave global concerns for Australia’s economy

Well there's a debate brewing in Australia over the health of the economy and one that seems to be gaining widespread commentary from around the world.

The point in contention is the mining boom with varying degrees of speculation from the boom is now heading into imminent bust though to continued activity with investment projects in the pipeline painting a positive economic future.

Hmmmm I tend to lean toward the former view myself and it is mainly because of China's situation that I hold a relative pessimistic view, though I consider that to be more cautious than doom and gloom. If our main customer dramatically cuts purchasing, then it's going to adversely impact the Australian economy in a major way.

We have little to offer in productivity terms in other industries. Manufacturing is in decline and even our housing industry is softening which are rather ominous signs in and of themselves, especially given that we are currently suppose to be in a mining boom.

The Australian mining industry is significantly buoying the economy of which without, will invariably fall into recession and it is going to be interesting watching politicians and economists scramble to attempt to rectify, or at least, mitigate the situation.



Yahoo News

Ever since investors got jittery about a Chinese hard landing, global analysts starting predicting that Australia was in for a rude shift in its fortunes.

In April, Dylan Grice from major European bank Societe Generale wrote that Australia is "a credit bubble built on a commodity market built on an even bigger Chinese credit bubble."

Grice summed up his beliefs claiming that "Australia looks like leveraged leverage, a CDO squared".

While the calls look to be over the top, Australian fortunes have been changing throughout 2012.

In August, BHP Billiton the world's largest miner reported a 35 per cent fall in profits. Shortly after that announcement the Federal Resources Minister Martin Ferguson officially called the mining boom over.

"Look at Europe, the state of the European and global economy. Think about the difficulties in China. The commodity price boom is over and anyone with half a brain knows that," said Ferguson.

On top of that, prices for Australia's biggest export, Iron ore, have dropped 30 per cent in the past two months and are about 30 per cent below the prices that the government used to forecast $66.9 billion in revenue during 2012-13.

While many in Australia, including the Reserve Bank of Australia, aren't buying into the claims Australia is heading for a financial cliff, the following comments from global analysts are troubling:

*"I felt more relaxed when Australians called themselves the lucky country with their typical honesty, realism and humility. Now that it's been upgraded to the status of miracle I'm worried," said Dylan Grice after a recent trip to Australia.

* "Right now is not a time to be buying real estate in Australia. The market has slowed substantially but residential prices are likely to fall up to 60 per cent, possibly even more, within five years," said US real estate analyst Jordan Wirsz earlier in the year.

* SocGen's analysts recently wrote, "The strength of Australia is particularly hard to explain, given the recent weakness in figures like the housing data."

* Last week, Deutsche Bank's Adam Boyton and Phil Odonaghoe warned of the end of the investment boom and a 2013 recession in Australia. "It does seem to us that there is some complacency surrounding the prospect of a sizeable decline in the terms of trade – and some over-confidence that the investment pipeline is 'locked in'. While there may be reasons as to why this time is different ...history would counsel some caution on the investment outlook. Indeed, an average response to a circa 15% decline in the terms of trade would see business investment falling in year over year terms by early 2013."

Warning: after boom it'll be Dutch and go

AUSTRALIA faces a run on its currency, a deeper collapse in housing prices and a bank funding crisis to rival Europe's as it tries to come to grips with life after the mining boom, according to a report from a boutique US advisory firm.

Entitled Australia: The Unlucky Country, the report from Variant Perception argues that Australia faces a classic case of Dutch Disease, the erosion of capability that flows from a resources boom and an overvalued exchange rate.

"The mining sector has crowded out almost all other sectors of the economy and also funnelled credit and liquidity into a housing bubble in the real estate sector," says the report, which has been circulated among global money managers.

The Australian dollar is overvalued on most metrics, one being the hamburger-based Big Mac Index, which has the Aussie 15 per cent to 20 per cent above par, Variant says. But it will need to fall well below par and stay there for some time for the rest of the economy to come to the fore after mining retreats.

"It will be almost impossible to move mining capacity to other sectors in Australia," the report says.

"This is a classic problem for economies who suffer from Dutch Disease. When the hangover arrives, writing off production capacity is often done at a considerable discount to cost.

''In addition, the manufacturing sector is under-developed and will not be able to take up the slack for the loss of momentum in construction and mining."

The report came as June construction figures released yesterday showed housing at its lowest in a decade, down 15 per cent from its peak two years ago. Non-residential building fell almost 20 per cent after the wind-up of the Building the Education Revolution program. Variant says the Aussie might slide smoothly as a result of the Reserve Bank cutting interest rates, or it could fall suddenly in a European-style crisis in which foreigners pull out of Australian banks and corporates.

"A total funding need from external sources of 40 per cent is extraordinarily high,'' the report says. "This increases the risk yet further should Australia face a funding shock, driven either by events at home (a severely slowing economy), or abroad (e.g., a euro-driven credit event). Australia's net external debt levels resemble those seen in the European periphery. Its net international investment position is deeply negative, worse than that of countries such as Turkey and Brazil."

Variant says the Reserve Bank will come to come to the rescue of the big four Australian banks in a crisis because they are too important to fail.

But Australian analysts dismissed many of Variant's conclusions as nothing new. "They've discovered the current account deficit," said one. "We discovered it in the 1980s and got on with our lives.'' Annette Beacher, the head of Asia-Pacific research with TD Securities, said the analysis was selective.

''There are scant fundamental grounds for comparing Europe with Australia,'' she said. ''Australian banks loosened their prudential standards on home loans only very briefly in 2006-07, and certainly learnt their lesson for the subsequent commodity boom.''

She noted that Australian banks were extremely profitable and now far less dependent on overseas markets for funding.

Americans trying to tell Australia how to run an economy. That is just too rich. It is as funny as hell. The US economy is going to go bust, that will take the rest of the world with it. Australia will feel it but it wont be all bad.

This would all be funny if it wasn't so sad.

P

The mining boom wont go bust, it will always have a level of demand, sure all those young fly in fly out workers might end up working in hj's or macca's, but there's still a massive amount of demand there.
And the Aussie $ is through the roof, once that cools our exports will be in greater demand.
As for houses, certain pockets of suburbs will lose value.. but for the most part there is a very small supply against a very large demand for housing in Australia, partiularly in WA. House prices will not bottom out like it did in the US.

to add, if your one of the 20something that went out and got HSV's, Boats and massive plasmas on credit.. you might find yourself in a pinch when the mining company doesnt need you to come back next month for your normal rostered 4 weeks onsite. ...

Australias biggest problem?
Is the influx of Indians and Asians coming in who are willing to do the same jobs for 40% less... and all the out sourceing in the name of profits.

Greed is our biggest threat.

Oh come on...

Australia is not immune to the real world. It was only a matter of time before they felt what the rest of the world has been. It will go through a recession of sorts and rebound.

It's cyclical.

Not the end of the world

Saw this coming a good 2years ago. Property & rental prices in Australia (sydney in particular) have sky-rocketed to unaffordable levels and have been begging for a "market correction" for a long while. Most people I know here are struggling to make ends meet with the rise in the cost of fuel, rent & utilities and don't exactly feel secure about their employment. The recession is coming whether we like it or not Better to have a recession now than a depression in a few years time...

Originally posted by SLAYER69
Oh come on...

Australia is not immune to the real world. It was only a matter of time before they felt what the rest of the world has been. It will go through a recession of sorts and rebound.

It's cyclical.

Not the end of the world

I love it how Americans are quick to belittle the problems which Australia is facing as unimportant, cyclical and "not the end of the world," but when its about the US, there is a huge freak out...

If exports fall to far china will enter a death spiral, doggie shadow banking
systems along with unsupported housing market with a huge over supply
of housing stock. And china is our main supporting pillor here. everyone
will be holding our breath if growth in china drops below 7%. true if the
mining boom comes a butsa we will be under it for the next 5-10 years. but
if china falls then we are in for very little growth prospects with the next two decaids
the real problem then becomes food and commodity prices, they would
still remain bouyant because food is something we all require but our buying
power will be severely deminished.
anyway i've gotta go

Originally posted by Agit8dChop
The mining boom wont go bust, it will always have a level of demand

All booms eventually go bust and when they do come back, it is usually vastly different than it was during the previous boom. I grew up in copper country. During the 80s and early 90s, there was a massive amount of money being made from pit copper mining in the southwest US. Laborers were making more than mid level office workers, complete with Phelps Dodge paid family housing and cut rate merchandise from the company store. Then the price of copper dropped. PD basically closed up shop for a few years. Entire towns suddenly went broke because the mines were the foundation of their whole livelihood. Ultimately, when the price of copper came back up and the recycle market began to lag demand, they started the pits back up... This time complete with mostly automated machinery and hevy leeching systems which required a fraction of the workers and, in most cases, received a fraction of the pay.

Don't place any bets on Australia's mining industry not experiencing the same. Further, with the global pressure on regulations and environmental restrictions, mining is fleeting at best. We will reach a point where mining is restricted to primarily third world countries where regulations don't trump development and the mining companies will make more profit than they ever dreamed by paying pennies on the dollar for labor.

Australia has a two track economy, and the mining economy represents only about 10%.

I do believe that the property market is due for a correction.

A bigger problem has been the casualization of the work force.