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The BHP Billiton Mount Whaleback iron ore mine, in the Pilbara Region of Western Australia. (HANDOUT/REUTERS)
The BHP Billiton Mount Whaleback iron ore mine, in the Pilbara Region of Western Australia. (HANDOUT/REUTERS)

Behind the Numbers

Looking for the upside of Down Under Add to ...

China's economy has been dragging its feet in recent months, and its sluggish demand has been dragging down commodity prices worldwide. Australia, a natural resources-driven country like Canada, is a natural exporter to its northern neighbour, leaving it particularly vulnerable to any Chinese downswing.

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But anyone looking for an antipodean recession may want to think again. Australia has a tendency to be surprisingly resilient and its stock market, which has already risen about 10 per cent this year in Canadian dollar terms, could continue to deliver more pleasant surprises.

“Are you trying to tempt me? Because I come from the land of plenty,” Men At Work vocalist Colin Hay asks a foreigner in the 1982 chart-topper Down Under, an ode to his home country. The boosterism rings true 30 years later. At about the same time as the song was released, Australia opened up its economy to greater trade and competition, and the country now boasts of being the only advanced country that's enjoyed recession-free growth for more than two decades.

Thanks in large part to China's insatiable demand for coal and iron ore during that period, Australia now enjoys a prosperity that North Americans can only envy. It has a jobless rate of just 5.4 per cent. Unlike other developed countries, which have slashed interest rates to multidecade lows to stimulate their economies, the Reserve Bank of Australia has been able to keep its benchmark interest rate at a relatively lofty 3.25 per cent.

The high rate means that Australia has a ready solution to the problem of a slowing China, according to a research report released this week by Pavilion Financial Corp. in Montreal. It could cut rates to boost growth.

Lower rates would help tame the rapidly appreciating Australian dollar, which has priced the country's non-commodity exports out of global markets.

Pavilion estimates that the market is pricing only about 25 basis points of cuts into exchange rates right now, versus 100 basis points in July. But if the central bank takes action to depreciate the Australian dollar, an unexpected rate cut would surprise the market, pushing it to outperform.

If China bursts out of its slow growth rut, even better. Pavilion expects a near-term upturn in the Chinese economy that will fuel more growth in Australia. Chinese manufacturing orders have historically been strongly correlated with the performance of the Australian S&P/ASX 200 index. If industrial production rebounds in China, Australia's equity market should benefit.

Of course, investors may want to play it safe and wait for the Reserve Bank of Australia to move. There's a song for that state of mind, too, by a band one can only assume is Men At Work's arch-nemesis: Men Without Hats. The song is called Safety Dance.

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