Australia Market
Australia’s two-track economy, Hitched to the China wagon
The shores of Botany Bay, modern Australia’s birthplace near Sydney, offer a snapshot of the country’s two-speed economy. Planes taking off over the bay whisk “fly in/fly out” workers to the booming resource-rich states of Western Australia and Queensland, offering wages four times Australia’s national average. For grounded workers at Kurnell, on the bay’s south side, the outlook is not so promising. Caltex, an oil company, recently announced it would shut a refinery that has produced petrol there for almost 60 years. Over 600 jobs will go. The soaring value of Australia’s currency, thanks largely to the resources bonanza, has made it cheaper for the company to import petrol from refineries in Asia and store it at Kurnell instead.
In July Australia ticked off 21 years without a recession, a feat unmanaged by almost any other rich country. Growth this year is forecast at 3.5%. China’s rise has fuelled Australia’s prosperity. An insatiable demand for iron ore and coal, Australia’s two main exports, has helped to make it Australia’s biggest trading partner. Mining investment drove half of Australia’s growth last year. China has even resurrected Australia’s wool industry, symbol of a bygone era when the country rode on the “sheep’s back” rather than on mountains of iron ore. China now buys over two-thirds of Australia’s wool. Australian Wool Innovation, an industry body, says it is easier to sell fine wool for clothes to China than to traditional recession-hit markets in Europe. Yet strains from Australia’s success are now starting to show.
The high value of Australia’s dollar is the biggest worry. The currency has mostly traded higher than its American counterpart since early last year. Once known for fluctuating with global risk sentiment, the Australian currency is now defying old patterns. Commodity prices, and thus Australia’s terms of trade (the relative value of exports to imports), have started falling. Yet since June the currency has risen about 10% against the American dollar (and in trade-weighted terms), and it now stands at around $1.05. Central banks and other foreign investors pouring money into Australian dollar assets are largely responsible. Foreigners now own nearly four-fifths of Australian federal government bonds. They are turning what was once a “commodity currency” into a safe-haven one.
Julia Gillard, the prime minister, says that the Australian dollar is likely to stay high “for years to come”. Australia’s central bank frets that this poses “important risks” for the economy. The currency has made casualties of manufacturers who can no longer export goods competitively. A recent report to Ms Gillard’s government calculated that over 100,000 manufacturing jobs had vanished since the start of the global financial crisis in 2007. Yet jobs are springing up elsewhere, especially in mining, health care and education. Australia’s unemployment remains steady at 5.2%.
Nonetheless Warwick McKibbin, a former central-bank board member, wants the bank to intervene and bring the dollar’s value down by printing money. The bank seems disinclined to follow his advice. Philip Lowe, its deputy governor, insists that the Australian dollar is not “fundamentally overvalued”.
If China’s slowdown has yet to affect the dollar, it may be felt in other ways. Mining investment grew by 70% last year. Deloitte Access Economics believes this investment surge will ebb in two years. Chris Richardson of that consultancy says that China’s slowdown, falling commodity prices and the rising costs of doing business in Australia have all made miners more cautious. On August 22nd BHP Billiton, Australia’s biggest company and one of China’s main suppliers of iron ore, reported a 35% drop in profit to $15.4 billion for the year to June. It also delayed a $20 billion expansion to a copper and uranium mine at Olympic Dam in South Australia. Some saw all this as ominous for the economy.
Ric Deverell, of Credit Suisse, a bank, reckons it is too early to pronounce the end of the Australian boom. Although China’s market for iron ore has cooled, energy companies are also investing A$180 billion ($189 billion) in liquefied natural gas (LNG) projects, mainly for export to Asia. “LNG is the main game,” he says. Glenn Stevens, the central-bank governor, reckons Australia’s luck has a way to go. Australia, he says, is better off exposed to China with a high variable growth rate than to Europe with a low one.