Here’s a little known fact: it has been over 20 years since Australia has experienced an economic contraction. According to the IMF (International Monetary Fund), Australia has not recorded a recession since 1991 and experienced growth even throughout the 2008 global financial crisis.
The Australian economy’s admirable performance over the past couple of decades can be mainly attributed to two factors: (1) the country’s vast natural resources and (2) a healthy relationship with China.
The rise of the Australian economy has mainly been due to the commodities boom fueled in large part by China’s explosive growth, with whom Australia became a major trading partner. Additionally, you could say it was mining that made Australia strong as they are rich in iron ore, gold, coal and natural gases (among others).
Case in point: the share of Australian merchandise exports to China surged from around 7% of total exports in early 2003 to around 48% in November 2015, according to the Australian Bureau of Statistics. Over that time, Australia also benefited from stable import prices aided by a resilient Australian dollar. These favorable trade terms helped Australia secure stable growth and weather global downturns
It also helped that, during the 2008 financial crisis, China implemented powerful stimulus programs that boosted the country’s demand for commodities and, effectively, kept Australia afloat. The relationship with China is no doubt beneficial, but it’s also increasingly precarious as China’s economy slows. So much so, that Australia’s central bank recently cut the benchmark interest rate to a record low (1.75%) in response. But, will it be enough?
Bottom Line for Investors
China’s large scale structural shift from infrastructure/investment to consumption-led growth has led to waning demand for commodities, which puts Australia’s growth at risk. The key for the Down Under economy will lie in their ability to diversify, and to boost industries like construction, education, finance and healthcare. Because, as we’ve seen firsthand in the last year, commodities prices and global demand are far from stable.
Disclosure