China’s stockmarket slump has rattled global investors and prompted fears that it could further undermine growth. As a result, commodities prices have slid to multi-year lows. That’s bad news for the Australian dollar, which has slumped to a six-year low around 74 US cents, and looks set for further falls.
Coal and iron ore are Australia’s main commodity exports, and prices of both have dropped sharply. As China attempts to rein in investment and construction, and improve consumption, a structural slowdown in demand for these materials looks on the cards. Now we can expect the price slump “to feed through into lower income growth and consumption demand”, says Rabobank’s Jane Foley, as the dwindling momentum in the mining sector ripples outwards.
Unfortunately, however, the rest of the economy doesn’t look ready to pick up the baton. The high Aussie has battered the non-mining industries in recent years. For instance, American and Japanese car manufacturers have pulled out after the strong currency dented their competitiveness. Consumers, meanwhile, are labouring under some of the highest household debts in the Western world.
Unlike the US and UK, Australia barely suffered a slowdown in 2009, let alone a nasty recession, so people have kept borrowing. The central bank is therefore more likely to lower interest rates than raise them. Along with rising interest rates in America, all this explains why UBS expects the Aussie to slide below 70 US cents in the next year.