Australia’s central bank cut interest rates to a three-year low of 3.25% this week as the economic data worsened. Australia’s trade deficit jumped to a three-and-a-half-year high. Sales of new houses dropped to a fifteen-year low. House prices, which ticked up in September as spring buyers appeared, have been falling or stagnant since the market peaked in 2010. The services sector continues to shrink.
What the commentators said
Commodity-rich Australia has had a “two-speed economy” of late, said Paul J. Davies in the FT. The China-led resources boom has underpinned growth: exports to China were worth 27% of GDP last year. But now prices for iron ore and coal, both key exports, have slid as China has turned down, and growth there shows no sign of picking up. So Australia “now needs to see a pick-up in domestic demand and consumption to protect” its 3.5%-plus annual growth rate.
But it’s hard to see where this will come from. The strong currency has made life difficult for non-commodity industries, while households “seem to have reached an upper limit to their borrowing capacity”, as Bank of America Merrill Lynch puts it. That’s hardly surprising, given that household debt levels are among the western world’s highest at 150% of disposable income, compared to around 115% in America.
The savings rate now “looks to be sitting at a permanently higher level than seen at any point since 1990”, said Jonathan Tepper of Variant Perception. Overindebted consumers are cautious because the housing bubble has been leaking air. With the non-mining sector in a “slump”, further interest-rate cuts likely in an attempt to end it, and the resources boom ending, the Australian dollar looks vulnerable, said Fxpro.com. Being short the Aussie against the three major currencies seems “a potentially lucrative position”.