“In both the US and European cases, the process of allowing things to go right to the brink of a very disruptive event before an agreement is reached on the way forward has been a source of great uncertainty and anxiety around the world.
“That anxiety has extended to Australia, even though, as I am sure people are sick of hearing me say, Australia is in the midst of a once-in-a-century event in our terms of trade. I won’t recite the facts yet again. Suffice to say that this is, at least potentially, the biggest gift the global economy has handed Australia since the gold rush of the 1850s.”
RBA Governor Glenn Stephens
Commentary & Analysis
Can Australia conquer adversity?
The Australian dollar has done very well lately and over the last couple years. Why? Well, because it’s been a go-to currency to capture yield … in a global environment of extremely low yields. The Australian economy has performed well based on its focus and available resources. Its central bank has done well to maintain a modicum of credibility. Its government has thus far escaped a global crisis and recession period with some credibility as well.
The Australian dollar has received due praise in the past … for all of the aforementioned qualities. And it still does. But this praise is typically muffled by the ever-present focus on global uncertainties, i.e. potential adversity (the list is quite long). In fact, I think the Australian economy is stuck there, between praise and adversity. The value of the Australian dollar is certainly not stuck yet, as we watch it hit new high after new high. But the longer-term outlook on the Australian dollar is likely growing stickier as the potential adversity it is facing grows.
Interest Rates: the Reserve Bank of Australia has kept interest rates relatively high, maintaining a grip on inflation, despite the fact that major economy central banks were at or approaching the zero bound.
Global Demand: capitalizing on their available natural resources, Australia has captured the benefits of global demand by starting at the beginning of the food chain – China – and selling the raw materials that fuel China’s production which serve to sate the consumption of the West.
Interest Rates: consumer confidence is showing signs of sluggishness, perhaps partly due to the tighter credit effect of rising interest rates.
Global Demand: China is slowing and Australia is vulnerable as a result; add to that, decelerating demand globally and Aussies golden-egg economy is subject to cracking.
Below are some ideas from RBA Governor Glenn Stephens in a recent address to The Anika Foundation. Governor Stephens covered the Australian growth model well …
First, to summarize him, Australia has recently (over the last 2-3 years) come off a strong and steady trend of growth in income and consumer spending. Naturally, they have seen savings grow and a trend of deleveraging develop … which has obviously seen the trend growth of household wealth flatten out. The fact that these growth drivers have noticeably moderated over recent years has been supplemented by the improvement in their terms of trade.
When Mr. Stephens says “terms of trade,” instead substitute “can’t dig stuff out of ground fast enough to satiate Chinese demand.” Thus, any decline in Chinese demand would likely undermine the level of household income and further undermine the level of consumer spending.
Would it be a self-reinforcing downward spiral for Australia if China cracks? I am not sure it would be that bad, but I think the economy would be hit very hard as the consumer pulls in his horns and housing prices fall. This is the same dynamic the US economy is trying to overcome. Is Australia destined to experience the same?
Granted, continued US dollar hatred, for good reason, means the Aussie likely looks past any growth concern and surges from new high to new high. But, if the dollar can stabilize, now that the debt deal is done, and Aussie interest rate expectations begin to change, the Aussie could be swiftly topped from its perch in the ozone. Stay tuned.