The worldwide economic recession of 2008 largely spared Australia, thanks to the country’s commodities, and government intervention. Since that time, Australia’s economy has continued to …
The worldwide economic recession of 2008 largely spared Australia, thanks to the country’s commodities, and government intervention. Since that time, Australia’s economy has continued to grow steadily. However, some industry analysts are concerned that the country’s current economic growth places it in a precarious situation by causing it to depend too heavily on China. Without a diversified economy, possible economic changes could catch the Australian market unawares.
Weighted commodities
Largely, Australia’s economic growth has been a result of investments in mining. The country has seen an upswing in the demand for iron ore, gas, and other commodities, due to the bustling economies of other nations. Among these countries, China has had the largest demand for these resources and has received the bulk of Australia’s mining exports.
Commodities have also become popular as a form of investment by traders in other countries. After the market for soft assets such as stocks and bonds tumbled, many investors made the shift to the hard assets that provided steady returns in the past. In response, the price of commodities rose, greatly benefiting Australia’s economy. According to a report by ANZ Bank and Port Jackson Partners, Australia could potentially sustain its economy for the next 20 years and create over 750,000 jobs from its mining operations.
Is the trend sustainable?
Despite the rosy economic forecasts, some industry experts have voiced worries about the sustainability of Australia’s economy. Commodities make up nearly 55 per cent of Australia’s annual revenues. Since the market is so dependent on commodities, a change in the values of these materials could dramatically affect the country’s welfare.
Australia’s biggest commodities client is China, which has been experiencing an economic boom of its own for the past few years. However, some analysts have expressed concern that the welfare of the Australian economy is too heavily reliant on China’s sustained growth. Should the Chinese economy experience a dramatic slowdown, the effect on Australia’s industries would be substantial. Some reports have claimed that even a five per cent slowdown in China’s economic growth could cause commodity prices to fall by as much as 20 percent.
There are other factors that could put a halt to Australia’s boom. China is one of the largest holders of European and American bonds, and the persistent recession in Europe and the US may well cause Chinese growth to decelerate. Since the commodities market relies on both the natural goods and the financing for projects, any interruption in funding due to economic investments in other countries could sharply affect market prices.
Should Australia diversify?
In view of these and other concerns, some market experts have strongly encouraged Australia to diversify its economy further to avoid exposure if commodity values fall. Prominent economist John Hewson echoed these fears, stating: “It doesn’t make good governance at all to be so deeply in debt to China …One day, China will stop paying high prices for commodities, like Japan and Korea did before them.” Australian officials, however, remain optimistic about the country’s economic future. National Treasurer Wayne Swan touted the country’s positive factors, saying: “Australia has very low public debt, low unemployment, a massive pipeline of investment and we expect to bring the budget back to surplus next financial year.”
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