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Despite the Slowdown, Australia Still Strong

“There is just a world of difference between the situation in Australia and the situation in Europe and the United States.” That’s the assessment offered by federal Treasurer Wayne Swan early in the day’s trading on Friday, Aug. 5, when the Australian share market followed through with its own swan dive after Western equity markets plunged the preceding day.

In his remarks Mr. Swan also noted a structural change that’s causing difficulty for critical segments of the domestic economy, primarily retail, tourism, education and manufacturing, which are suffering the impact of a stronger currency. Australians are reining in their spending, as home prices have cooled. Devastating floods in Queensland have also had a lingering impact, putting another drag on confidence.

The Australian economy contracted by 1.2 percent in the first quarter of 2011. The International Monetary Fund (NYSE:IMF) revised downward its estimate for GDP growth Down Under in 2011, to 2 percent. The RBA followed suit this week, changing its expansion estimate to 2 percent from 3.25 percent. The RBA, the first developed central bank to boost interest rates following the global consensus on monetary policy occasioned by the financial crisis, held its target overnight rate at 4.75 percent this week, among the highest in the world.

Retail sales for June fell 0.1 percent from May’s levels against a forecast of growth of about 0.2 percent. Sales in May were down 0.6 percent from April. Annual retail sales total AUD240 billion and account for a fifth of Australian GDP. A lot of people work in the sector, and it remains an important barometer of domestic economic conditions.

Here’s what the RBA had to say in its statement revealing the downward GDP revision and its interest rate decision:

Growth over 2011 has been revised downwards due to a slower than expected recovery in coal production --a key industry for Australia -- and to a lesser extent a downward revision to consumer spending as domestic and international concerns have weighed on sentiment.  

The medium-term outlook continues to be characterised by the significant pipeline of resource sector investment with a number of large projects already underway and by strong growth in resource exports.

There is a large divergence between the mining and related sectors and the rest of the economy with the cautious behaviour of households, the unwinding of the fiscal stimulus and the high exchange rate weighing on a number of industries.

Although the mining boom remains in full force, growth in non-mining sectors has slowed. World growth is weaker, and overall risks have certainly increased in recent days. But Australia’s economy will continue to ride unprecedented demand from Asia for its natural resources. But the situation is becoming more complicated, as inflation is rising at a pace outside the RBA’s target range. Meanwhile Australia’s trade surplus hit a record AUD22.5 billion  in the 12 months ended Jun. 30, as exports surged 17 percent to AUD298 billion. Iron ore, coal and agricultural exports. Exports to China and Japan, Australia’s top trading partners, rose 39 and 26 percent respectively. Australia’s terms of trade, a measure of export prices relative to import prices, are at a 140-year high.

As I wrote in my recent InvestingDaily.com article, After the Crisis?, trade with Asia helped Australia avoid the Great Recession, and it’s ready to benefit from a huge amount of spending coming from China. As is the case with Canada, demand for its resources has driven a rally in the Australian dollar (the “aussie”).  The Australian resources industry is riding a similar wave of high commodity prices that’s boosted Canada’s national wealth.

And there are roughly USD400 billion in new resource extraction projects planned in Australia over the next five years. Western Australia leads the way with USD242 billion in planned resource and infrastructure projects, with approximately half of that spending concentrated in mining, particularly iron ore. There are a lot of natural gas projects as well. Western Australia will have to support population growth, as mining and construction will need an additional 260,000 workers over the next five years, according to government estimates.

Although there are certainly headwinds, unemployment is low, as is public debt. And the nation’s financial system is also in relatively strong shape.



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.