Australia has been rated a high risk of slumping into recession, with commodity prices diving, public finances deteriorating and unemployment rising. After a record twenty-four straight years of economic expansion, has the lucky country’s luck finally run out?

From having at one point a stronger currency and lower unemployment rate than the United States, the tables have rapidly turned for the land “Down Under” following the end of the China-driven mining boom.

Analysts have put the chances of a recession in the world’s twelfth-largest economy at as high as 50 percent, hit by a downturn in the nation’s largest trading partner, China, which has slashed prices of key exports such as coal and iron ore.

Strategist Gerard Minack, “a well-known bear,” told the Sydney Morning Herald in March that the bursting of a housing bubble would mark the end of the good times for Australia.

"There's a 25 to 33 percent chance of a recession in the next 12 to 18 months," Minack said, with only "okay" employment data preventing him from calling a recession “outright.”

Goldman Sachs chief economist Tim Toohey reportedly agreed, predicting a one-in-three chance of recession in 2016. Bank of America Merrill Lynch chief economist Saul Eslake put the odds at “below 25 percent,” saying it would be the “first one that was not preceded by tight monetary policy.”

Already, the resource-rich state of Queensland has revealed that it fell into recession in 2014 for only the third time in the past thirty years, hit by lower prices of coal and other commodities. Its iron ore-rich counterpart, Western Australia, has seen growth slump to just two percent in fiscal 2016, its lowest rate since the recession of 1990.

On May 12, Australian Treasurer Joe Hockey told the nation the cupboard was bare, with previous hopes of a fiscal surplus pushed back to the end of the decade and likely even later. From a projected budget surplus of four billion Australian dollars by 2017, the government now expects a deficit of A$35 billion in the coming fiscal year and another A$26 billion a year later, while the jobless rate is seen climbing to 6.5 percent.

Hockey blamed drought, the “largest fall in our terms of trade in half a century” and a weaker than expected global recovery for wiping out A$90 billion in forecast government revenue.

Describing it as a “soft, cuddlier budget,” ANZ Research noted that structural reforms had been postponed, with any further economic deterioration likely to leave government finances stuck in the red for some time.

The Australian Financial Review’s Christopher Joye was harsher, saying the nation “faces its biggest fiscal challenge in 60 years and does not deserve an AAA credit rating.”

According to Joye, since the budget’s underlying cash balance fell into the red in fiscal 2009, the cumulative shortfall between the government’s revenue and spending has blown out to nearly twenty percent of gross domestic product (GDP).

Joye pointed to a blowout in household debt, which now exceeds 150 percent, despite the lowest interest rates on record, with much of it consumed by rising housing prices in the major cities of Sydney and Melbourne. Yet with the housing market already overvalued by an estimated twenty percent, fiscal and monetary policy options “all but completely spent,” Joye said there few options left to combat a real downturn.

“The rating agencies are smoking dope if they think Australia is a better ‘credit’ today than it was in the 1980s and 1990s,” he said.

On May 5, the Reserve Bank of Australia cut the official cash rate to a record low of two percent, citing weak business and public investment. In its meeting minutes, the central bank said it could consider another cut should the economy weaken further, with the hoped for surge in housing investment lacking outside Sydney and Melbourne and a weak Chinese economy weighing on the commodities sector.

Hockey’s budget forecasts predicted real GDP growth of 2.75 percent in fiscal year 2016, rising to 3.25 percent the following year and 3.5 percent thereafter. But with the forecasts relying on heavily indebted consumers spending more, the resource sector struggling to recover and the national currency remaining stubbornly high, others are less optimistic.

“If Australia does suffer a recession in the next few years it will most likely begin in one of three areas: the property market, our major banks or our mining sector. If I was a betting man I’d put my money on either the property market or the mining sector, with the financial sector suffering a second-order shock,” according to Business Spectator columnist Callam Pickering.

Amid claims that Australia’s housing market resembles “a giant Lehman Brothers,” analysts say the economy would be lucky indeed to continue its winning run through to the end of the decade.

Ex Dame Pansi wrote on May 24^th, 2015 at 5:11pm:


A spike in unemployment could trigger a property collapse for those unfortunate enough to be over-committed with no financial reserves. A property collapse could also trigger a downward spike in the stock market, and the negative wealth effect from the property and stock market downturn could then strangle spending, spreading a recession to manufacturers, distributors and retailers.

Unemployment is currently spreading through the resource sector. In one instance a mining company suspends operation, workers are unemployed and a major contractor then collapses.

Note the 10.4% national unemployment and 30% for 18-24 by Roy Morgan. This is very bad news with more cuts coming.

More employment cuts coming

Quote:

Close to 600 people are set to lose their jobs after Atlas Iron announced it will close its mining operations.

The company said it will suspend mining over the month of April, with exports to cease a short time later.

The move comes in light of the iron ore price dive which has seen the commodity lose 25 per cent of its value since the start of the year to trade at 10-year lows.

Atlas Iron’s break-even price is $US60 a tonne, well above the current spot price of $US47 a tonne.

All Atlas’ projects will be put on care and maintenance, pending future iron ore market conditions.

The company will cease mining and crushing at its Mt Webber project this week, while operations at the Abydos project are scheduled to come to a halt within 14 days.

Atlas Managing Director Ken Brinsden said the decision to suspend production was taken after extensive consideration of the company’s financial position, discussions with contractors and secured creditors.

“To suspend our operations, with the impact that will have on so many committed and talented people, is an extremely difficult decision,” Brinsden said.

“I sincerely thank all those who have worked so hard to build Atlas’ production base and those who have worked furiously to maintain Atlas’ competitive position over the past 15 months, in the face of increasingly oppressive market conditions.”

Western Australia Premier Colin Barnett said the move by Atlas was of “immense concern” and again hit out at the strategies of BHP Billiton, Rio Tinto and Fortescue Metals Group.

The big miners have been blamed for the falling price of iron ore as they pump record volumes into the market despite reduced demand.

In comments reminiscent of those made just months ago, Barnett warned the miners that they did not own the iron ore reserves.

"The State Government owns the iron ore and we are not willing to simply allow the iron ore continue to be sold at throwaway prices - and that's a pretty clear message to the iron ore industry,” he said.

"Don't forget who owns the iron ore, who controls the projects, who controls the ports, who controls tonnages and the like."

Barnett said he wants companies to understand that he is not “some dopey Premier” who will sit back and do nothing while the resource value falls.

"I cannot understand the business strategy of the three big major iron ore producers of flooding the market when the market is weak," he said.

"That is just a flawed strategy and not only has it hurt a company like Atlas Iron - dramatically - I think the companies are hurting their own shareholders and indeed the market.”

Atlas said it believes the price of iron ore will eventually increase based on the significant percentage of global iron ore production which is now cash flow negative.

However it said the timing of this recovery is unclear and the company is now in discussions with its creditors concerning options which would enable its mines to re-start as efficiently as possible in a circumstance where an operating margin can be re-established.

The flow-on effect the mine closures will have were highlighted this morning with mining contractor MACA announcing its revenue guidance would be impacted by the lost contract.

The contract at Abydos for both mining and crushing services generated between $4 million to $5 million per month for MACA.

In an ASX statement this morning, the company said as a consequence of the contract suspension its full-year revenue guidance for the 2015 financial year will be $600 million.

It is not the government debt alone that can trigger a recession. Growing government debt is a sign that something is wrong with the economy which will take a long time to fix.

It is more likely to be something like unstoppable unemployment growth which then triggers mortgage defaults with consequent pressure on banks.

Sir lastnail wrote on May 25^th, 2015 at 12:40pm:



That looming GFC went straight over longie's head, like most things.

Remember he called us a bunch of doom-sayers with morbid depression for even mentioning an economic collapse. Just like he's doing now with the housing boom. Longy doesn't realise there will come a time when the government can no longer hold up the housing market by manipulating the conditions in which it grows. He's like a kid that can't understand there'll be no more lollies when he finishes that bag.