Australia is one of the hottest economies outside emerging markets. Aussies created 1.85 billion US dollars of wealth in the past 18 months, just a hair behind the ballyhooed Brazilians. This, despite the highest benchmark rates in the world. Australia provides iron, coal and gas to China and India and moves in lockstep with those economies. But does its reliance on natural resource exports expose it to risk of a slowdown in demand?
Australian miners may not be digging to China, but they are certainly digging for China – shoveling at a fevered pace while Australia’s biggest trading partner still has a strong appetite for commodities from Down Under. Australia’s government confirmed that between April and October of 2011, its mining industry committed a record AUD 231 billion to 105 new exploration projects for iron ore, gas and coal. That commitment signals “significant” growth in the country’s mid- to long-term trading activity with China – which buys roughly one-third of all Australian exports.
Europe Casts a Shadow
Despite this wealth of resources and ready markets, the famously upbeat Australians seem downcast. The rumble of massive mining drills can’t drown out the European debt crisis and headlines from the US, where political paralysis over America’s deficit threatens to lower its bond rating and restrict its borrowing capacity. “You see no one spending,” says David McDonald, head of Australia research for Credit Suisse. “Consumer sentiment is quite low, the savings rate has been the highest it’s been for 30-odd years. So, people keep reading the press every morning about what’s happening in Europe. They read about the US debt ceiling. All of that is worrying them.”
Anxious Aussies Despite Low Unemployment
The ASX 200, Australia’s benchmark index, has been reflecting that anxiety, falling in recent weeks before rallying. Still, there is much to cheer Down Under, particularly compared with other OECD nations. Unemployment is hovering around 5 percent, debt-to-GDP is low at 29 percent and the housing market is relatively stable, with prices down just 3 percent since last year.
World of Wealth Down Under
And Australians have money to spend, according to the Credit Suisse Research Institute’s 2011 Wealth Report. The country ranked second this year, behind Switzerland, with an average household wealth of 396,745 US dollars, a 37 percent increase over last year’s average. In addition, Australia has the same number of millionaires as China, a country 55 times its size. At the end of 2011 the Reserve Bank of Australia predicted the economy would grow by 3.5 percent in 2012 and much of that economic growth comes from the mineral and oil industry – which represents about 8 percent of the country’s gross domestic product.
Resources Insulate from Global Issues
So while Aussie eyes are trained on Europe and the US, it is the sale of resources to Asian markets that will insulate the country from global economic pressures, according to Marcel Thieliant, a global economist who covers Australia for Credit Suisse. “If you look at oil demand from 2009, it hardly fell; while demand for machining and equipment, for example, fell 50 percent,” Thieliant says. “So, I think if you are a resource exporter, you are always a bit more protected, because I think resources are typically not as volatile as final consumption goods.”
It helps, too, that China is eager for those resources. In 2011 China’s economy grew 9.1 percent, according to the Australian central bank – which has been monitoring that growth from a new office within the Australian embassy in Beijing, opened in September.
Economists and mining officials expect China’s economy to slow in the next few years and that softening will bring a decline in the country’s now red-hot pace of infrastructure investment. “That said, I think even then, China will grow much stronger than most of the other trading partners of Australia, so the export share will continue rising,” says Thieliant. So Aussies take heart. “We have a relatively strong forecast for Australia next year, and I think the consensus is that Australia will continue to grow next year,” Thieliant added.