Australian Economy Watch: Latest Data

Includes: BHP, EWA, FXA, RIO, WBK
by: Paulo Santos

It was only days ago that I wrote an article explaining the 3 major blows that I expect Australia's economy to suffer, starting in 2012. Those were:

  • A blow to exports, which are overly reliant on basic materials.
  • A consequent reduction in mining investment, that presently represents 10.5% of Australia's GDP and as such makes Australia's economy incredibly vulnerable to any reduction there (yet, this investment was 1/3rd or less not long ago).
  • A hit to Australia's real estate, which has been in a long term bubble that rivals America's.

Today's article updates on this expectation. Basically, everything confirms what has been said before, with several real-time data points coming in exactly in line with the thesis. In the last 3 days, we had the following releases:

  • Australia's GDP grew at a 0.4% rate in Q4 2011, half what was expected. Not only was the growth below expectations, but the composition was exactly in line with the thesis, since what had the greatest impact was a large (-4.7%) deterioration in the terms of trade - that is, Australia's exports were already under pricing pressure during Q4. This pricing pressure is expected to intensify.
  • Unemployment moved up 0.1% in February, to 5.2%, after a surprise 0.1% reduction in January. Given the number of persons employed in construction and finance, I would expect the unemployment rate to climb a lot more in the future.
  • January trade balance turned into a deficit and saw a large (-8%) fall in exports from December 2011 to January 2012 (seasonally adjusted). This is in line with my expectations of ongoing deterioration in the terms of trade as well as volumes, and it's telling that exports to China fell 23%. The trend is clearly down, both for exports and for the trade balance.
  • Building approvals, both for housing and non-housing, continued their sharp downward trend. Prices spent most of 2011 going down, and activity is following - hard. Overall approvals are now falling at close to a 15% rate year-on-year. This is in line with the thesis that construction/real estate is going to represent a significant headwind for the Australian economy.

Market consequences

Given the magnitude of the expected economic impact, as well as some of the nature (real estate), it is expected that once again the financial sector will be at the forefront of the losing sectors. To take advantage of this, the only U.S.-quoted stock is Westpac Banking Corporation ADR (NYSE:WBK), though the market in general could be shorted through the iShares MSCI Australia Index (NYSEARCA:EWA) ETF.

Also, taking into account that Australia's financial sector has a good deal of foreign financing, and that exports are also expected to be significantly hit - as well as the expectable interest-rate cutting reaction by Australian monetary authorities - it is predictable that the Australian Dollar will suffer. It might be possible to take advantage of this by shorting the Rydex CurrencyShares Australian Dollar Trust (NYSEARCA:FXA).

Finally, since mining will be at the center of this economic problem (through reduced exports and eventually, reduced investment), shorting the mining companies might also make sense, namely Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP).


The thesis that Australia's economy will face a difficult 2012, and maybe even 2013, continues unabated. The most recent data confirms the 3 major axis through which I expect most of the economic impact to manifest itself.

Disclosure: I am short AUD/USD.