Australian Economy Relies on Resources Industry for Export

Today your editor is scrambling to get the January issue of Australian Small-Cap Investigator out the door before the month draws to a close.

We’ve even put in a call to the Gregorian calendar to see if they can extend the month to 32 days so we can tie up the loose ends over the weekend. Turns out that’s not possible. We’ll just have to suffer through it and stick to our deadline!

So we’ll be shorter than normal today.

We’ve got a bunch of stuff we’d like to write on property today, but we couldn’t do it justice so we’ll leave that until tomorrow.

But until then, you may want to take a look at the latest research from Demographia. It will probably not surprise you to learn that Australia has the most unaffordable houses in the world.

Four of the top five in fact.

Anyway, take a look at the report yourself. To be honest, we don’t know the guys and girls at Demographia from a bar of soap. But we’re happy to give them some airplay. At the very least it should help to balance out the pap you read in the mainstream press such as…

“House prices soar 12pc amid recovery” in today’s The Australian newspaper.

Today I want to take a brief – very brief – look at China. You know China, that’s the economy to our north that saved Australia from economic death last year.

As you may have read in these pages before, don’t believe the hype about Australia’s resilient economy and sound banking system being the reasons why Australia scraped through without much damage.

It was all down to one reason – the Chinese.

But while the Chinese may have helped out last year, the news in recent days points to the perils of relying on the irrational whims of an overseas government to prop up your domestic economy.

News reports such as “China pushes to wean banks off lending” should be enough to send a shiver down the spine of any Australian corporate bigwig.

Because make no mistake, the Australian economy is tied at the waist, the hips and the legs to the Chinese economy. Should the Chinese authorities decide enough is enough it will be curtains not just for companies in the resources industry, but every sector of the Australian economy.

Even sectors that would appear to have little connection to mining will be affected. And so will individuals.

How come? Well, simply because the Australian economy has so much riding on the resources industry in terms of exports.

If the Chinese stop buying up all of Australia’s natural resources the consequences will be dire.

Simply put, while the Australian dollar has become stronger partly due to higher interest rates than other economies, it is still the commodity currency status of the Australian Dollar that has driven it higher.

That’s because all – or most – of the money used to buy up those resources is eventually converted from US dollars or Japanese Yen or Chinese Yuan into Australian dollars.

Naturally, when we import goods there’s also a bunch of Australian dollars that are converted into other currencies as well which helps to even things out.

But imagine if suddenly the export of resources hit the skids. We saw how this could look when the Australian dollar sank from USD$0.98 to around USD$0.60 last year.

That was just a short term hit, and was really influenced more by a ‘flight to safety’ rather than mindless dumping of the Aussie dollar.

A seizing up of the Chinese economy would be entirely different. That wouldn’t be a short term blip at all. And for Australia it would mean a similarly big fall in the value of the Aussie dollar.

And unlike during the mid-2000s when the dollar was priced around USD$0.50, just as the resources boom was taking off and the China story was starting to make front page headlines, there would be no ‘get out of jail free’ card for the Australian economy this time.

Look, we’ve seen plenty of headlines in the past about the Chinese authorities threatening to put the brakes on economic growth. In the most part the economy has continued to surge on and the Australian economy has benefited from it.

But like all bubbles and all winning streaks, this one will end too. The worrying aspect to all this is that there doesn’t appear to be a Plan B.

What will the Australian economy export if no-one wants our resources? Quite frankly, the options don’t look very promising.

Cheers.
Kris.

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Tagged as: Australian economy, australian small cap investigator, Chinese economy, Demographia, export, recovery, resources industry