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NEWS IN CHARTS: HAS THE LUCKY COUNTRY’S LUCK RUN OUT?

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Apologies for posting this in World Affairs, but there's no Australia section.

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News In Charts: Has the Lucky Country’s luck run out? | Alpha Now | Thomson Reuters

NEWS IN CHARTS: HAS THE LUCKY COUNTRY’S LUCK RUN OUT?
October 10th, 2014 by Fathom Consulting
No Comments
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A booming natural resources industry has underpinned Australia’s relatively healthy macro-economic fundamentals over the past decade. Nicknamed ‘the Lucky Country’ after a book of the same name published in 1964, as the commodity super-cycle turns Australia’s good fortune may be at an end.

China’s slowdown is a game-changer for commodities, and for base metals in particular. The price of iron ore – which makes up around a quarter of Australia’s total exports – has halved since the end of 2012, and is now hovering at around $80 per metric tonne. Even if China’s policy makers manage to engineer a soft-landing, we expect growth in what, according to IMF estimates, is now the world’s largest economy to be weaker next year than this. And this has important implications for Australia, which has become increasingly reliant on Chinese demand, with exports to China rising from 1% to 6% of GDP over the past ten years.

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Skyrocketing base metal prices in the past decade led to substantial overinvestment in the Australian mining industry, with iron ore production up more than 40% over the past four years. At the same time, the large producers seem prepared to engage in a price-war aimed at forcing their smaller, higher cost competitors into distress. BHP Billiton recently said that it plans to ramp up iron ore output, despite acknowledging that supply growth would exceed demand ‘in the short to medium term’, and Rio Tinto confirmed that it would go ahead with a planned expansion of mining production. So not only has global demand for Australia’s key natural resource fallen, that country’s ability to extract it has, with characteristic bad timing, risen too, putting further downward pressure on prices.

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Further reductions in the price of Australia’s major export will, of course, put additional downward pressure on that country’s terms-of-trade, which had more than doubled since the turn of the century, and on the AUD. In addition, a rising dollar environment implies a further squeeze on commodity prices; and if the recent dollar uptrend evolves into a lasting bull market, akin to those witnessed in the early 1980s and late 1990s, then there could be a lot more downside. Taken together, these forces suggest residents of the Lucky Country are likely to feel distinctly less well off.

This backdrop suggests serious headwinds for Australia’s public finances. This week, Treasurer Hockey said that “there has been a hit to the budget” from lower iron ore and coal prices, frustrating the authorities’ effort to move public finances back into the black. As result, the government is likely to revisit its forecast of a A$30 billion deficit for the current fiscal year, following the shortfall of A$50 billion recorded in the twelve months to June. What is more worrying, in our view, is Mr Hockey’s conviction that the Chinese government will not “permit … a significant economic deterioration from what is near 7.5% growth”. This year, he may have a point. But next year is much harder to judge. We see around a one in three chance that China is already in a hard-landing scenario. If this risk materialises, growth next year is likely to be in the low single digits at best.

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With the tailwind from the resource investment boom fading, and with limited scope for further fiscal loosening, the burden of cushioning the impact from China’s economic rebalancing has fallen on the central bank. The RBA has shifted to a progressively more accommodative stance. Governor Stevens has reduced the policy rate by 225 basis points to 2.5% since the end of 2011 – the real policy rate has been in negative territory for the last year or so – and has openly been talking the currency down.

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The RBA expects below-trend GDP growth for a few quarters yet, and believes that “it will be some time before unemployment declines consistently”. There are indeed good reasons to be cautious. The decline in mining employment has gathered pace recently. Business investment remains subdued and it seems unlikely that other sectors will pick up the slack anytime soon. Despite current low rates of nominal wage growth, with what for now remains a strong currency Australian labour costs are among the highest in the world. In turn, sluggish economic conditions have dented consumer sentiment, as evidenced by weakness in the Westpac consumer confidence index and disappointing auto sales growth.

Australia’s easy money policy has not been without consequences. Home prices in major cities rose by 4.3% in the three months to August, the fastest pace in five years. Worryingly, this boom has a strong speculative element. Low interest rates and strong competition between domestic lenders have led to a marked increase in lending to property investors – not least from China – who now account for some 40% of total home loans. The RBA has repeatedly highlighted the risks to household finances and the banking sector from future price declines.

If China is to make the transition to an economic model that is less reliant on investment, then this inevitably will have profound implications for the composition of Australia’s economy. Net exports remain the main engine of expansion, having contributed around two-thirds to total economy growth over the past four quarters. However, as what Governor Stevens has called a “once in a century” rise in terms of trade reverses, Australian policymakers need to grapple with the structural weaknesses that lie beneath the surface.

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The combination of Australia’s AAA rating with yields that are still relatively attractive among developed economies – the ten-year sovereign yield stands at 3.30% – means fixed income assets should stay well-supported. Foreign ownership of Australian government bonds remains high. And it may rise still further if the ECB and the Bank of Japan ramp up their asset purchase programmes. Equities have been on the back foot since September, down by more than 10% in dollar terms, and it remains to be seen whether a weak materials sector – which accounts for around one sixth of total market capitalisation – pulls the S&P/ASX 200 still lower. Our strongest conviction relates to the currency, which we expect to weaken substantially in the medium term, as demand for Australia’s major export declines still further. In the short-term, we see a weaker Australian dollar as the principal release valve during the economy’s transition away from a resources-driven growth model.

The long process of adjustment in Australia will be far from smooth, and investors would do well to recognise that the economy has to date felt nothing more than the initial tremors – China’s inevitable rebalancing has barely begun.

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This research note is provided by Fathom Consulting. All of the charts below and many many more, covering a range of topics and countries on both the macroeconomy and financial markets are available in the Chartbook to Datastream users at www.datastream.com. Alternatively you can access Fathom’s Chartbook at www.fathom-consulting.com/TR.
 
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Pretty sure this also has a bit to do with Brazil being a more reliable supplier of iron than Australia. Don't quote me on this, but I remember something like a conflict between Chinese and Australia government on Australian iron mines, which ended with China switching some of the business to Brazil.
 
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Apologies for posting this in World Affairs, but there's no Australia section.

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News In Charts: Has the Lucky Country’s luck run out? | Alpha Now | Thomson Reuters

NEWS IN CHARTS: HAS THE LUCKY COUNTRY’S LUCK RUN OUT?
October 10th, 2014 by Fathom Consulting
No Comments
View attachment 124451 EmailPrint
A booming natural resources industry has underpinned Australia’s relatively healthy macro-economic fundamentals over the past decade. Nicknamed ‘the Lucky Country’ after a book of the same name published in 1964, as the commodity super-cycle turns Australia’s good fortune may be at an end.

China’s slowdown is a game-changer for commodities, and for base metals in particular. The price of iron ore – which makes up around a quarter of Australia’s total exports – has halved since the end of 2012, and is now hovering at around $80 per metric tonne. Even if China’s policy makers manage to engineer a soft-landing, we expect growth in what, according to IMF estimates, is now the world’s largest economy to be weaker next year than this. And this has important implications for Australia, which has become increasingly reliant on Chinese demand, with exports to China rising from 1% to 6% of GDP over the past ten years.

View attachment 124452

Refresh Chart Edit Chart



Skyrocketing base metal prices in the past decade led to substantial overinvestment in the Australian mining industry, with iron ore production up more than 40% over the past four years. At the same time, the large producers seem prepared to engage in a price-war aimed at forcing their smaller, higher cost competitors into distress. BHP Billiton recently said that it plans to ramp up iron ore output, despite acknowledging that supply growth would exceed demand ‘in the short to medium term’, and Rio Tinto confirmed that it would go ahead with a planned expansion of mining production. So not only has global demand for Australia’s key natural resource fallen, that country’s ability to extract it has, with characteristic bad timing, risen too, putting further downward pressure on prices.

View attachment 124453Refresh Chart Edit Chart
View attachment 124454
Refresh Chart Edit Chart

Further reductions in the price of Australia’s major export will, of course, put additional downward pressure on that country’s terms-of-trade, which had more than doubled since the turn of the century, and on the AUD. In addition, a rising dollar environment implies a further squeeze on commodity prices; and if the recent dollar uptrend evolves into a lasting bull market, akin to those witnessed in the early 1980s and late 1990s, then there could be a lot more downside. Taken together, these forces suggest residents of the Lucky Country are likely to feel distinctly less well off.

This backdrop suggests serious headwinds for Australia’s public finances. This week, Treasurer Hockey said that “there has been a hit to the budget” from lower iron ore and coal prices, frustrating the authorities’ effort to move public finances back into the black. As result, the government is likely to revisit its forecast of a A$30 billion deficit for the current fiscal year, following the shortfall of A$50 billion recorded in the twelve months to June. What is more worrying, in our view, is Mr Hockey’s conviction that the Chinese government will not “permit … a significant economic deterioration from what is near 7.5% growth”. This year, he may have a point. But next year is much harder to judge. We see around a one in three chance that China is already in a hard-landing scenario. If this risk materialises, growth next year is likely to be in the low single digits at best.

View attachment 124455

Refresh Chart Edit Chart

With the tailwind from the resource investment boom fading, and with limited scope for further fiscal loosening, the burden of cushioning the impact from China’s economic rebalancing has fallen on the central bank. The RBA has shifted to a progressively more accommodative stance. Governor Stevens has reduced the policy rate by 225 basis points to 2.5% since the end of 2011 – the real policy rate has been in negative territory for the last year or so – and has openly been talking the currency down.

View attachment 124456

Refresh Chart Edit Chart

The RBA expects below-trend GDP growth for a few quarters yet, and believes that “it will be some time before unemployment declines consistently”. There are indeed good reasons to be cautious. The decline in mining employment has gathered pace recently. Business investment remains subdued and it seems unlikely that other sectors will pick up the slack anytime soon. Despite current low rates of nominal wage growth, with what for now remains a strong currency Australian labour costs are among the highest in the world. In turn, sluggish economic conditions have dented consumer sentiment, as evidenced by weakness in the Westpac consumer confidence index and disappointing auto sales growth.

Australia’s easy money policy has not been without consequences. Home prices in major cities rose by 4.3% in the three months to August, the fastest pace in five years. Worryingly, this boom has a strong speculative element. Low interest rates and strong competition between domestic lenders have led to a marked increase in lending to property investors – not least from China – who now account for some 40% of total home loans. The RBA has repeatedly highlighted the risks to household finances and the banking sector from future price declines.

If China is to make the transition to an economic model that is less reliant on investment, then this inevitably will have profound implications for the composition of Australia’s economy. Net exports remain the main engine of expansion, having contributed around two-thirds to total economy growth over the past four quarters. However, as what Governor Stevens has called a “once in a century” rise in terms of trade reverses, Australian policymakers need to grapple with the structural weaknesses that lie beneath the surface.

View attachment 124457

Refresh Chart Edit Chart

The combination of Australia’s AAA rating with yields that are still relatively attractive among developed economies – the ten-year sovereign yield stands at 3.30% – means fixed income assets should stay well-supported. Foreign ownership of Australian government bonds remains high. And it may rise still further if the ECB and the Bank of Japan ramp up their asset purchase programmes. Equities have been on the back foot since September, down by more than 10% in dollar terms, and it remains to be seen whether a weak materials sector – which accounts for around one sixth of total market capitalisation – pulls the S&P/ASX 200 still lower. Our strongest conviction relates to the currency, which we expect to weaken substantially in the medium term, as demand for Australia’s major export declines still further. In the short-term, we see a weaker Australian dollar as the principal release valve during the economy’s transition away from a resources-driven growth model.

The long process of adjustment in Australia will be far from smooth, and investors would do well to recognise that the economy has to date felt nothing more than the initial tremors – China’s inevitable rebalancing has barely begun.

View attachment 124458

This research note is provided by Fathom Consulting. All of the charts below and many many more, covering a range of topics and countries on both the macroeconomy and financial markets are available in the Chartbook to Datastream users at www.datastream.com. Alternatively you can access Fathom’s Chartbook at www.fathom-consulting.com/TR.


Australia should surrender to india to turn its economy around:P
 
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Australia should surrender to india to turn its economy around:P

Doesn't work. India's total ore, slag, ash import from 2012 is about 6 billion USD.

TP_IP_CI_P

Chinese ore, slag, ash import from Australia alone is 50 billion USD in 2012. It is simply too large to make up by India.
 
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they will go further bankrupt so more trade china does with russia. There is no point importing natural resources across an ocean if you have natural resources right a cross the boarder and much cheaper to invest in. Australia is doomed
 
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they will go further bankrupt so more trade china does with russia. There is no point importing natural resources across an ocean if you have natural resources right a cross the boarder and much cheaper to invest in. Australia is doomed

Even Pakistan's resource sector remains untapped.

Australia is going to regret not developing an industrial base. There is not a single reputed Australian brand in the world today.

Its a country where rulers are stupid and people are becoming lazy. As far as the mining industry goes. It will go up when Australia scraps the carbon tax and finally kneels to the corporations.
 
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they will go further bankrupt so more trade china does with russia. There is no point importing natural resources across an ocean if you have natural resources right a cross the boarder and much cheaper to invest in. Australia is doomed

Well, that's not exactly true. China-Russia trade is mainly energy. China-Australia trade is mainly ores. Different stuff really. The best alternative to Australia is Brazil (at least as far as iron goes).
 
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Well, that's not exactly true. China-Russia trade is mainly energy. China-Australia trade is mainly ores. Different stuff really. The best alternative to Australia is Brazil (at least as far as iron goes).
not true russia has massive iron ore reserves
 
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not true russia has massive iron ore reserves

Yes, it does, but Russia has its own steel industry. As a result, it doesn't really export any ore. Australia and Brazil, on the other hand, export ore to the Chinese steel industry.
 
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Yes, it does, but Russia has its own steel industry. As a result, it doesn't really export any ore. Australia and Brazil, on the other hand, export ore to the Chinese steel industry.
yeah but there is enough ore in Siberia for the whole world
 
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Morgan Stanley Turns Mega-Bear on Australia - Real Time Economics - WSJ

  • ed8a10028a02042c341332ed0dfd943a.gif
  • November 5, 2014, 1:34 AM ET
Morgan Stanley Turns Mega-Bear on Australia
ByJames Glynn
5f01db86725ea22118991bc4f3cedfa8.jpg

A mine worker walks past a train loader at Rio Tinto Group’s West Angelas iron ore mine in Pilbara, Australia.
Bloomberg News
Economists don’t ever agree on much, but they certainly don’t agree on the prognosis for Australia’s economy.

A bump in retail-sales data in September gave ballast to the argument that Australia is transitioning away from mining, a sector which is suffering amid weak commodity prices.

But less sanguine observers say the nation is far from making the switch away to a more locally driven economy. Count Morgan Stanley among the naysayers.

On Wednesday, the bank poured a cold warning on any optimism, saying the country may be on track for its first recession in more than two decades—unless the government takes action.

Morgan Stanley revised lower its forecast for economic growth this year to 3.2% from 3.4%. in 2015, it now expects growth of only 1.9%, down from an earlier forecast of 2.5%. That compares with the current central bank forecast of around 3%.

Some economists saw a rise in retail sales in September as signaling that record low interest rates, in place for over a year, are starting to help demand.

Optimists see a property boom in the eastern cities of Sydney and Melbourne as spurring demand, taking up some of the slack as the western-focused mining boom fades.

They also cite a falling Australian dollar, which helps commodity exporters, local manufacturers and retailers, as reason to take hope.

Morgan Stanley begs to differ.

“The economic transition in Australia from the resources boom to east coast recovery has stalled,” it said.

Morgan Stanley says most commentators are underplaying the impact of falling commodity prices on the economic outlook.

The price of iron ore, the country’s biggest export, has dropped 40% this year, and coal also is sliding. An end to an investment boom in mining has thrown many Australians out of well-paid jobs.

The bank notes the Australian dollar’s fall hasn’t kept pace with the decline in commodity prices.

The currency will need to fall to around 0.76 to the U.S. dollar, much lower than just under 0.90 now before it starts to support growth, Morgan Stanley said. It doesn’t expect that to happen until late 2015.

And if this wasn’t gloomy enough, the bank says weak wage growth and rising joblessness will keep a lid on household spending.

Morgan Stanley thinks unemployment will drift toward 7% over the coming year, up from a current 12-year high of 6.2%, making it one of the few commentators to expect things to worsen. The government will release employment data for October on Thursday.

So what should the government do?

The bank urges more rate cuts, from the current record low of 2.5%, and an end to belt-tightening by a government that’s worried about growing public debt.

Morgan Stanley says there’s a 50% chance the central bank will need to further cut rates, despite Gov. Glenn Steven’s public statements that monetary policy has done all it can do.

The current market consensus is for a lengthy period of stable rates followed by increases starting late next year. Still, other observers, including J.P. Morgan Chase & Co., say the central bank may have to further lower rates.

Mr. Stevens has warned that lower rates risk overheating the property market. He’s called on businesses, instead, to start lifting the economy by investing more aggressively.

Meanwhile, Australian Treasurer Joe Hockey has committed the government to new taxes and big spending cuts that politically would be difficult to reverse.

“The last Australian recession was back in 1991,” Morgan Stanley’s economists say. “Avoiding one at this juncture requires a change in policy settings to offer more stimulus. The risk we see is that conditions almost certainly need to deteriorate before this will occur.”

Australia has taken extraordinary steps in the past to boost growth. Over the 1980s and 1990s at various times the country floated its currency, dropped trade barriers, reformed its wage-fixing system, allowed in foreign banks, and granted its central bank independence.

Those radical changes, combined with rising Asian demand for the nation’s resources, helped drive up productivity and create a recession-free period since 1991.

Morgan Stanley says the benefits of those reforms are now looking “exhausted.” The bank called for more government spending on infrastructure to lift growth.
 
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Well, the back stabbing Aussies should've seen it coming. You don't bite the hands that feed you. They did just that.

Their way out might be just to close their eyes and say "Asian Pivot" 100 hundred times;)
 
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NZD and AUD dollars were selling like hot cakes when the Chinese economy started slowing down :P

Having resources does not make you rich, you got to sell it to someone :P Australia should find more markets and i believe Indonesia , south Korea and India would be willing to make deals.
 
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