Not so fast Australia!

By: Kevin_George

The “lucky country” managed to live up to its name in becoming the only industrialized country to escape recession.

Australia’s economy contracted in the final quarter of 2008, but then managed to escape a technical recession by bouncing back with gains of 0.4 and 0.6% in the first two quarters of 2009, with growth of 1.75% expected on the year. The RBA also acted sharply to raise interest rates, despite a tumbling inflation rate.

Those who have been quick to celebrate the Australian “economic miracle” may be reacting too quickly as it remains to be seen if Chinese demand will continue to support the Australian resources sector. The global bounce created by trillions of dollars in stimulus spending has helped to put a floor under commodity purchases and price, which will lead to the 1.75% gain on annual GDP growth. Not a big cushion to rely on once the stimulus wears off.

Australia’s mining sector has grown from 4.5% in 93/94 to 8% in 06/07, largely on the back of exports to China. This is still a fragile sector as the plunge in commodities prices in the middle of 2008 highlighted, with mining firms cutting costs, projects and jobs, whilst accepting drastic cuts in prices for ore as it became a buyers market.

The continuing rise of China to economic superpower status is not a done deal as many people assume. China has reacted to the financial crisis with stimulus spending of its own, which has helped to boost its GDP figures. The problem for China, is that it is betting on the recovery of the U.S. consumer and a preservation of the status quo. China is spending big on infrastructure to support a level of exports that may not exist beyond the stimulus spending.

As money continues to fuel surging asset prices in emerging markets, the risks for investors who also play the China call option are great. Another headwind that resources exports may face is the current move towards climate change deals and cap and trade. Australia is currently the largest exporter of coal in the world. Industries such as these may be a risky bet in the move to clean energy and emissions cuts.

Australia has survived the financial crisis well and has a stronger fiscal position than the debt-laden western economies as it seeks to build sustainable GDP growth. However, if the events of 2008 taught us anything, it would be wise to move forward with caution. Chinese consumption and growth is not the one-way bet that many assume.

By Kevin George

I am an independent financial analyst and trader.

© 2009 Copyright Kevin George - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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