By Isabella Zhong
Browsing recent headlines emblazoned across the business pages
of Australia's newspapers would leave the distinct impression that
the run of good fortune in the Lucky Country is set to come to a
shuddering halt.
"Goldman Sachs: The worst is yet to come," trumpeted The Sydney
Morning Herald, as the newspaper telegraphed the investment bank's
concerns about the "income shock" Australia faces as a result of
the decline in commodity prices. Prices for iron ore, Australia's
largest export, have plunged around 40% this year to a five-year
low, while coal prices dropped have 15% compared to a year ago.
Much of the slump has been fueled by concerns about China's demand
for commodities as its government attempts to rebalance growth in
the world's second largest economy.
Australia's track record of growth is the envy of policymakers
around the world. The country has notched up 23 consecutive years
of growth, with the global financial crisis shrugged off thanks to
a combination of low interest rates, government spending, and most
importantly, exposure to China's debt fuelled, resource intensive
building binge unleashed to underwrite growth during the heart of
the crisis. While no-one is predicting a recession in Australia,
more sober times are coming. The days of the cashed-up bogan
enriched by the mining boom are over.
Weak prices for Australia's major exports and the waning of the
investment boom in major resource projects gives policymakers
plenty to worry about. The narrative of Australia's economic growth
over the past decade has been shaped around the idea of a two-speed
economy. In the halcyon days of the resources boom it was the
mining states of Western Australia and Queensland that outpaced
those states with less bountiful geological endowments. The tables
have now reversed. Bean-counters in Canberra, Australia's capital
city, haven't smothered themselves in glory with an iron ore
forecast of US$100 a ton contained in May's federal budget. Iron
ore currently trades around US$80 a ton.There is no doubt an income
shock is coming. The Reserve Bank of Australia recently lowered its
growth estimates by a quarter of a percentage point expecting the
economy to grow between 2% and 3% by June next year.
There are clearly good reasons to be downbeat on the trajectory
for Australia's growth. But opposing opinions make for a good
market, and there are some analysts who argue that the outlook is
not as dire as promoted by more bearish investors. "The basic
argument is that Australia's mining boom is fading rapidly and
there is a lot of uncertainty about what will drive the economy,"
says Shane Oliver, AMP Capital's chief economist.
One pillar of support for the Australian economy is the
expectation for interest rates to remain low. The waning of
activity in the once-red hot resources sector will dampen
inflationary pressures, providing the Reserve Bank of Australia
with the flexibility to keep interest rates low. Bond futures
suggest interest rates are likely to be kept at a record low of
2.5% at least until the middle of next year. The RBA hopes lower
rates will allow the non-mining part of the economy to shoulder the
yoke of growth as resource industry activity cools. There is no
doubt the hammering of commodity prices will complicate the
transition.
The RBA, unlike many major central banks, has plenty of monetary
policy ammunition should growth slow faster than expected. However,
the central bank's willingness to pull on the monetary policy
levers may be complicated by housing bubble concerns in major
markets like Sydney. But Bruce Rolph, Citi's head of Australian
equities research, doesn't see a housing bubble, pointing out
Australia's real estate sector is mainly driven by domestic demand,
which will be buoyed by low interest rates.
Australia's four big banks -- Commonwealth Bank of Australia (
CBA.AU), Australia and New Zealand Banking Group ( ANZ.AU),
National Australia Bank ( NAB.AU) and Westpac ( WBC.AU) -- also
stand to benefit, as the low interest rate environment drives
borrowing activity. While Australia's major banks have proved
resilient to the global economic turmoil, their hold over more than
80 per cent of the home loan market bears watching should
unemployment start ticking higher. "The banks are still doing well
and the high yields offered on their stocks make them attractive to
investors," said AMP Capital's Oliver. Australia's big four banks
offer a dividend yield of around 6% on average.
Retail stocks have taken a beating as the clouds gathered above
the Australian economy. Department store operator Myer Holdings (
MYR.AU) is down 30% so far this year, while electronics retailer JB
Hi-Fi ( JBH.AU) has fallen 25%. However, both Oliver and Citi's
Rolph see decent upside in the retail sector. In addition to low
interest rates continuing to fan household consumption, there could
be another less obvious driver -- a depreciating Australian
dollar.
Analysts expect the Aussie dollar to drop to USD0.85 by June
next year, while Oliver sees the exchange rate possibly falling to
as low the high USD0.70 level. Although that will make imports more
expensive for Australians, retailers may actually see sales go up.
"When the Australian dollar is high, Australians tend to travel
overseas and do their shopping there, as well shop online on
international sites," said AMP Capital's Oliver. "But as the
currency depreciates, people will return to brick-and-mortar
stores."
In the long term, the slowdown in Australia's mining sector
could also benefit the overall health of the country's economy.
"The country is getting back a more balanced economy, as growth
picks up in New South Wales and Victoria and slows in Western
Australia," says Oliver.
The Lucky Country may be set for tougher times, but it could be
the long overdue prescription for rebalancing an economy built on
the expectation that commodity prices would remain stronger for
longer. They clearly haven't.
Email: isabella.zhong@barrons.com
Comments? E-mail us at asiaeditors@barrons.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
