What's next for Australia?

The Australian economy is visibly slowing down. For instance, annual GDP growth deteriorated to 3.6% in Q1 2008 from a peak of 4.7% in Q3 2007. But how much slowdown should we expect during the next few months?

In our opinion, the Australian economy may have a sharper slowdown than most economists expect. Consumer sentiment fell sharply in early June and is now at it its lowest level since the last recession. Business confidence slumped to the weakest level since the 2001 terrorist attacks in the United States. Home-loan approvals declined in March to the lowest level in more than three years. The employment rate released in May fell for the first time since October 2006. In addition, at the same time the price of gasoline rises, households are cutting on spending. Housing and consumer spending account for almost two thirds of the economic growth.

Yet, despite all the problems with domestic demand, Australia should be able to avoid economic recession. Indeed, Australia is one of the largest exporters of agricultural, minerals and energy commodities and the demand for these merchandises is constantly rising, boosted by emerging markets. In fact, exports of raw materials contributed 17 percent to the 1 trillion dollar economy during the last year and commodity exports are expected to rise to a record $202 billion in 2009. For instance, Rio Tinto recently announced that Baosteel Group Corp, China's biggest steelmaker, will pay 80 percent more for iron ore shipped from Australia.

Anna Fedec, analyst@tradingeconomics.com
6/27/2008 1:44:32 PM