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China Slowdown Hits Australia Where it Hurts

Rudd

Is Kevin Rudd the canary in a global coal mine?

Last week, the Australian Labor Party leader scored one of the biggest victories of his career, unseating former Prime Minister and rival Julia Gillard and taking her spot as PM. But the real challenge for Mr. Rudd is only beginning, as he is taking power just as the Aussie miracle may be reaching its expiration date. As Rudd noted shortly after taking office, the slowdown in China spells serious trouble for Australia, where commodity production has been a key driver of the national economy.

The long boom years in China blessed commodity producers around the world with years of high demand and high prices for their exports. In Australia, this meant that there has been no recession since 1991, and the country weathered the recent financial crisis mostly unscathed. But China’s deceleration is quickly changing that, and while it isnt known yet how deep or how long China’s growth trough will be, Aussies are already bracing for pain. The FT reports:

Clouds started to gather over the economy last August when the price of iron ore, the country’s most valuable export, fell sharply. Resource companies responded by cancelling or postponing projects. Those clouds have become darker in recent months as it has become clear that growth in China, Australia’s biggest export customer, is slowing and that resource investment is close to peaking, if it hasn’t already.

These concerns have been reflected in financial markets, where the Australian dollar has fallen by 12 per cent against its US counterpart to US$0.92 since mid-April. Australian government bonds and equities have also suffered sharp falls.

That should be a warning to some others. Brazil, already shaken by protests and a collapse in growth, may have a lot more pain; the oil powers, espicially Iran, Venezuela and Russia, face trouble as well. South Africa and Argentina are two more countries who would be badly hurt if commodity demand slows.

Not everyone would suffer, of course. A commodity reversal could be good news, however, for Europe and Japan, where commodity production is low. The US is a balanced economy, with strong commodity, industry and service sectors. We will likely be ok, though prolonged weakness in oil prices would slow, but not stop the development of the new oil boom.

Even when China recovers its moxie, we are likely to see its economy shifting away from the current heavy commodity processing, energy burning, crude industrial model. China badly wants to move up the food chain to higher value-added, cleaner production: more services, less pig iron; more design and fashion, fewer cheap industrial goods. If this happens, demand for raw material imports from China may rise more slowly than GDP overall.

[Kevin Rudd photo courtesy of Wikimedia Commons]

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  • Jim__L

    I thought there was a story a while back about how China’s growth was being hurt by production moving to other countries.

    If that’s a major contributor here, wouldn’t that mean Australia’s commodities would just be in demand elsewhere, as other poor countries imitate China’s rise?

    • Andrew Allison

      Commodity prices are falling across-the-board due to declining demand (http://www.indexmundi.com/commodities/)

      • Jim__L

        Well that figures, when the world economy is experiencing dislocations.

        This is probably a nice opportunity to make long-term investments in some Aussie commodity production ventures. =)

    • ljgude

      Sure, and Australia sells a lot of commodities to Japan too and other SE Asian countries and has a clear geographical advantage in this part of the world. But as Andrew points out commodity prices have fallen due to drop in world wide demand which was just insatiable in the run up that has kept Western Australia, in particular, booming for years.

  • ljgude

    I have the best seat in the house on this one folks. I live in Perth, and Western Australia which is the state that produces the bulk of Australia’s commodity exports. This town has been rolling in money and has a property boom that makes it one of the most expensive places anywhere to buy a house. But I have friends in retail and the glow is definitely off and has been for a good six months. Australians tend to anticipate bad times and wind their necks in before the blow falls. Rudd or alternative Tony Abbot will have some tricky times to manage economically. Switching to the more conservative Liberal Party, which has a good record for financial management might be the obvious choice, but Liberal leader Abbot is a Roman Catholic Social Conservative, like Santorum in the US, in a country that has little love for that kind of politics. Even though Gillard’s Labor government was clearly on the nose with voters, I expect Rudd to improve labor’s chances. His opponent has weaknesses and he doesn’t have to defend his predecessors government.

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