The boom Down Under may soon be over.
Australia’s central bank has cut its benchmark lending rate for the second time in as many months, confirming fears that Europe’s debt crisis and a slowdown in China are threatening the resource-driven economy.
The Reserve Bank of Australia lowered its cash rate by 25 basis points to 4.25 per cent, Tuesday. That followed a similar reduction in November.
Much like Canada, Australia was a global leader among developed countries in weathering the 2008 financial crisis. A stable banking system, coupled with demand from China and other Asian nations for its commodities such as oil, iron ore and coal, helped Australia endure the downturn.
As U.S. and European property markets tumbled, housing prices in Australia’s major cities including Sydney, Melbourne and mining-centred Perth continued to skyrocket throughout the crisis.
The resource boom, however, pried open a deep divide that is now commonly referred to as the Australian “two-speed economy.” The economic growth of resource-heavy states such as Western Australia powered higher while more densely populated, manufacturing-driven states in the east stagnated.
Now, as manufacturing output and exports decelerate in China, demand for Australia’s commodities is under threat. Commodity prices are falling, while at the same time there are early signs of potentially significant cracks in Australia’s economic health.
Australian house prices in major cities have slipped 4 per cent in 10 months, according to property valuation firm RP Data, and as many as 18,000 small businesses are set to declare insolvency next year, according to the Council of Small Businesses in Australia.
The most recent capital expenditure survey showed that while mining investment in Australia rose sharply in the third quarter and is expected to remain strong, spending in other industries will stay weak. Sukhy Ubhi, Asia economist at London’s Capital Economics, noted in a report to clients that Australian asset prices, credit growth and the labour market “have all softened compared to earlier this year.”
In a statement, Glenn Stevens, the governor of the Reserve Bank of Australia, highlighted challenges faced by Australians outside of the resource sector, which has propelled Australia’s currency to relative parity with the U.S. dollar.
“Changed behaviour by households and the high exchange rate have had a noticeable dampening effect. The unemployment rate has increased a little since mid year, though it remains close to 5 per cent,” Mr. Stevens said.
Australia’s third quarter GDP, scheduled to be released early Wednesday, is expected to show the economy expanded at a slower pace than it did during the second quarter.
China is Australia’s largest trading partner and the Asian economic superpower is beginning to slow following a series of policy moves over the last year to rein in inflation. Last week, China’s central bank reversed course, cutting the reserve requirements for Chinese banks for the first time in nearly three years amid weakening manufacturing output.
While about 70 per cent of Australia’s exports are destined for Asia, a struggling Europe and potential collapse of the European Union was also a factor in the bank’s decision to reduce rates.
“The likelihood of a further material slowing in global growth has increased,” Mr. Stevens, said. “China’s growth has been slowing, as policy makers there had intended. Trade in Asia is now, however, seeing some effects of a significant slowing in economic activity in Europe.”
Troubles for Australia’s economy could signal comparable problems in Canada. With a similar sized population as well as a resource-heavy economy, Canada, like Australia, has a lofty property market that has yet to suffer a significant correction.