Why Australia won't escape the crunch
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Associate Editor
David Stevenson Jul 06, 2009
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"The Aussies aren't as confident or brash as they normally are".
That's Steve Harmison talking about the cricket (the Ashes) starting on Wednesday, of course. But he could equally well have been talking about the Australian economy.
Although Australian shares have done well recently, problems are about to hit the country's finances. And it could now be time to sell out Down Under...
Along with almost every other world stock market, Aussie shares have done well over the last four months. The All Ordinaries index of the country's largest 500 companies has rallied 23% from its early March low. But what sets Australia apart from virtually every other developed economy, is that after 17 years of unbroken economic expansion it hasn't (technically at least) gone into recession.
Yet dodging 'negative growth' is not down to the country somehow avoiding what's been happening elsewhere. It's just that the Aussie government has doled out large chunks of cash to lower-income earners, and - unlike in the US and the UK - consumers have been cajoled into keeping on spending. Without that, PM Kevin Rudd admits, the economy would already have shrunk about 0.2%.
A once buoyant economy is buckling
But the bad news is now stacking up thick and fast. In May exports fell 5% from April to a 14-month low. And despite capital goods imports crumbling 14% - a sign companies are slashing capital spending - the trade deficit is widening, which is a downer for the Aussie dollar.
On the domestic front, things are even bleaker. Lending by the nation's bank's fell back 0.1% in May as company borrowing slipped by 0.7%. Job adverts are 50% lower than last year, says ANZ bank. Meanwhile, prospects for the building industry are looking grim. May new home sales tumbled almost 6% from the previous month, the first fall this year. Worse, approvals to build or renovate houses and apartments slumped 12.5% in May from April, the biggest drop since November 2002.
What's more, out in Western Australia – mining territory - home repossessions for the year to 30th June have just doubled compared with the previous year, to a record high, due to rising unemployment. Overall the last six months have seen more repossession applications than in any full year since records began nine years ago.
Sound familiar? This does seem like shades of the States and Britain. Yet even worse, the real trouble hasn't really started yet.
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"The full brunt of the deepest and most synchronised post-war global recession has yet fully to bear down on Australia", says Su-Lin Ong at RBC Capital Markets, "export income, the terms of trade and business investment are all set to move substantially lower in 2009". In other words, Australia just won't be able to defy global economic gravity any longer.
When your domestic economy is up the creek, it's more than handy to have a wealth of natural resources to help to balance the books. But there's a problem here too.
Why China can't save Australia
Exports will be coming even more under the cosh. Take iron ore. Already, Australian producers are being forced to slash prices to keep customers interested. The Chinese – Australia's biggest overall export buyers - recently demanded price reductions of up to 45%.
It may not come to that, but a major cut is on the cards. For the moment, as we discussed in the magazine recently (Seven safe stocks that will last longer than the rally – if you're not already a subscriber, get your first three issues free here), the Chinese are cashing in on sharply lower commodity prices to stockpile as much as they can.
But leaving aside all the predictably upbeat talk from Beijing officials, economic growth isn't really happening for the Chinese right now. And Australia isn't the only exporter to China who'll hurt as a result. Overall Chinese shipments from Japan plunged 30% year-on-year on May following a 26% slump in April, indicating that the Chinese economy is really so sluggish it needs far fewer imports.
"China isn't turning out to be an engine of growth for Asia", says Bloomberg's William Pesek, and "if you think China will power a global recovery, think again". A couple of weeks ago, Albert Edwards of Société Générale was even blunter: "Nowhere in the world fills me with more scepticism than the Chinese economic recovery. China could be the biggest disappointment yet".
Time to exit Australian stocks
In a nutshell, it's becoming ever harder to work out what will get the Australian economy moving again. Yet measured in sterling, Aussie shares have outscored both the FTSE 100 and the Dow Jones Industrial Average by hefty margins so far in 2009, rising over 6% compared with a 4.5% drop in London and a 16% Wall Street dip.
Great if you've been on board, but the good times could be coming to an end. Dumping Australian shares now looks right – particularly London-quoted Aussie-based miners such as Rio Tinto (LSE: RIO), already up 60% in 2009 on hopes of a commodity-driven global recovery.
Meanwhile – weather permitting - enjoy the cricket!
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David Stevenson
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