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Recession Alert for the Australian Economy

Written on 04 October 2013 by Dan Denning

Recession Alert for the Australian Economy

In all the hubbub about the US government shutdown, let’s not forget that Australia’s Economy is headed towards a 2014 recession.

This is not a bad thing, mind. Recessions are the corrections for previous credit excesses. An economy in recession is reloading and getting ready to reallocate its resources toward more productive uses.

But before that, the recession. In Australia’s case, the latest evidence is that the Australian economy can’t manage to generate a trade surplus. The August deficit was $815 million, seasonally adjusted, according to data released this week by the Australian Bureau of Statistics. In the last three months alone the country has racked up an impressive $2.7 billion trade deficit.

As my colleague Greg Canavan pointed out in a note, the August figures include strong iron ore prices and volumes. He asks rhetorically, ‘When is this mining boom meant to pay off?’

My answer, non-rhetorically, is that Australia had a resources boom and all it has to show for it is this lousy trade deficit, a rising government debt, and a housing bubble. QED recession in 2014.  

The iron ore price is worth a closer look. It was the backbone of the resources boom and the one thing everyone is counting on to keep on keeping on. For example, Australia should export nearly 1 billion tonnes of iron ore per year by 2018, according to the latest quarterly report from the Bureau of Resources and Energy Economics (BREE).

BREE reckons exports will grow by 8% a year between now and 2018 and that, ‘The strong growth is being supported by many of the mines in the Pilbara region of Western Australia being at the lower end of the cost curve.

What official estimates of iron ore exports generally fail to talk about is whether Chinese steel production – the great driver of Aussie exports – is sustainable at future levels (much less at current levels). China is set to produce nearly 755 million tonnes of steel in 2013 – more than the next five countries combined.

As usual, some portion of this production is driven by top-down decisions in the Chinese Communist Party (CCP) to stimulate the economy so it grows at 7.5% a year like clockwork (enough to keep unemployment from becoming socially destabilising).

Too many people who analyse the Australian iron ore industry, and thus the Australian economy, take growth rates in Chinese  steel production at face value.

The official forecasters at Treasury (and in the RBA and the banks) missed the end of the resources boom because of overly-optimistic forecasts of commodity price growth (and thus government taxes and resource royalties). They’re going to miss the recession of 2014 for the same reasons. They’re not looking.

Dan Denning+
Editor, The Denning Report

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Dan Denning
Dan Denning is Editor in Chief at The Daily Reckoning and the Publisher of Port Phillip Publishing. Dan is also the investment analyst and editor of The Denning Report. His high-level, macro-economic and stock market forecasts are read by more than 35,000 high-dollar investors and fund managers in over 70 countries. If you're already a subscriber to these publications, or want to follow Dan's financial world view more closely, then we recommend you join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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2 Comments For This Post

  1. andy Says:

    Nothing will stop the recession that is coming and nothing will stop the housing market crash that will come later.

  2. Dulong Ttil Says:

    I believe that what the Japan’s monetary easing policy is doing to push the YEN downwards healthily is an appropriate action for the Australian government to consider. In a layman term, just print more money to make the currency move downwards peacefully.

    Since the YEN is much cheaper than before, the export and tourism businesses from Japan are active again. This is exactly what we want to see.

    Also, if the A$ depreciate, it will show an improvement of our government’s overseas investments which are usually calculated in foreign currencies.

    Before A$ starts to depreciate, it should be a good idea for investors in Australia to rapidly purchase some overseas assets e.g. a supermarket chain in Hong Kong or some businesses in China or other parts of Asia.

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