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April 12, 2013

Australia's Economy Continues To Grow, With No Recession In Sight

The cheerful economy of the Lucky Country has come of age. Despite occasional setbacks at home and in the global economy, Australia has managed to grow for the last 21 years straight, with nary a recession in sight. In fact, its economy grew in 2012 at the fastest pace since 2007 on a rise in exports, according to data from the Australian Bureau of Statistics, and the Australian economy surpassed Spain in 2012 as the world’s twelfth largest—not bad for a country that’s slightly smaller in size than the contiguous U.S. but boasts only 22,262,501 people (the U.S. has over 314 million, and Spain a little over 47 million).

The Commonwealth of Australia, which only became a country in 1901—when its six original colonies federated—has capitalized on its vast natural resources to become a prosperous place. It has also managed to balance productivity, demand, and monetary policy to withstand a global economic downturn that has put much of the rest of the world in the shade for the past few years. The country weathered the global slowdown with a still-growing economy thanks to a stimulus package, put in place by the government under former Prime Minister Kevin Ruud, and low interest rates; during the period it recorded only a single quarter in which its economy shrank.

Fitch Ratings just affirmed the country’s AAA rating with a stable outlook at the end of March, citing numerous factors including the fact that “Australia has built up the capacity to absorb shocks due to a combination of low public debt, a free-floating exchange rate and liberal trade and labor markets, which allows the authorities to run strong countercyclical policies during downturns and the economy to adjust.”

Much of Australia’s prosperity is thanks to its vast array of natural resources. Mining is a large part of its economy; in addition to being a source for gold, silver, diamonds, opals, and many other minerals, Australia is the largest net exporter of coal in the world, all by itself accounting for 29% of global coal exports. It also boasts a large service sector and strong employment.

While there have been a few slowdowns in domestic spending recently—manufacturing and construction were down in the latest report—consumer confidence has risen, backed by a slight rise in household spending. While consumers did cut back on recreational spending, dining out, and hotels, they put the money instead into clothing, food, utilities, healthcare—and new vehicles.

Investors interested in such a bright picture in an otherwise often-gloomy worldview might have heard that the mining sector Down Under has slowed. While that’s true, there are still plenty of opportunities—in other sectors—to provide balm to a weary investor’s bank account—er, heart. And even mining isn’t completely cast in gloom.

A warning by the Australian central bank that the country’s mining services industry is in for a decline came on March 27; the Reserve Bank cited cutbacks in funds for investment and exploration in the sector, as well as a sharp decline in earnings, as the reason for its concern—not just for the sector, but overall, since mining plays such a large part in Australia’s economy.

 

However, only three days later, an investment of nearly $7 billion was announced that would boost mining tycoon Gina Rinehart’s Roy Hill iron ore project in the Pilbara region of the country’s Western Australia state and allow China’s MMG to proceed with its own zinc, silver, and lead mine in western Queensland. Korean company Samsung C&T is set to build the Roy Hill project, which includes an open cut mine, an ore processing plant, a railway line for transport of the processed ore, and port infrastructure at Port Hedland.

Korean, Japanese, and Chinese companies all own stakes in Rinehart’s mine, although she retains a 70% controlling interest. MMG expects up to $1 billion in funding for its mine from the China Development Bank; MMG’s largest shareholder is China Minmetals Corporation, a business owned by the Chinese government.

Mining isn’t the only sector benefiting from the involvement of outside investors, nor is Asia the only interested region. According to the Reserve Bank, $284 billion was spent on resource projects, both new and existing, since 2003. Of that money, 90% came from publicly listed companies, and close to half of those companies are foreign. Australian resource companies have, as a result, not had to resort to seeking additional funds from either banks or shareholders.

Add to that the fact that no less a personage than Jeffrey Immelt, chairman and CEO of GE, said in a report that the company wanted to collaborate on productivity-boosting software analytics in Australia’s thriving natural gas sector. Immelt predicted that commodity prices would remain high thanks to a rising Asian middle class, which would underpin a move for Australia into the position of exporter of high-tech mining products.

Qantas Airways, meanwhile, has won provisional approval from the Australian Competition and Consumer Commission to engage in a partnership with Emirates, seen as a way to boost the airline’s international division. Qantas has been cutting less profitable routes and engaging in other cost-cutting measures to improve its bottom line, and the Emirates link provides a way for the airline to continue to provide service to its customers without having to maintain flights to destinations it would prefer to drop. The Australian airline will also shift its hub for European flights from Singapore to Dubai as a result of the partnership, with the two airlines jointly providing coverage to Europe, the U.K. and North Africa.

And the government of New South Wales is planning a multibillion-dollar convention and exhibition center in the belief that international business travel will rise by up to 93% over the next ten years. The complex is to be built in Sydney’s Darling Harbor, and will add to facilities already existing at Sydney Olympic Park.

All that trade with China, meanwhile, has led the Australian government to push for a direct currency deal. Australian Prime Minister Julia Gillard’s trip to Beijing the first week in April is intended to put the seal on an agreement to bypass the U.S. dollar in foreign trade. China accounts for nearly 30% of Australia’s export sales, and for the last fiscal year that amounted to $120 billion. Removing the risk of the exchange rate for those transactions, as well as the transaction cost itself, would be valuable.

In a government report titled “Australia in the Asian Century,” Canberra’s efforts to bring about trade directly between the Australian dollar and the renminbi are discussed, as well as its work to advance use of the renminbi as a global reserve currency. And in 2012 Canberra signed a $30 billion currency swap agreement with China that it hopes is just the beginning.


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