Australia may now be a five-time cricket World Cup champion but when it comes to its economy, it is still not the strongest team in the world. A mining-led boom peaked in mid-2012 and has slowed down in the last couple of years with the economy growing at 0.5 per cent in the last quarter of December 2014.
The past Australian GDP growth figures show the country has seen its economy grow at 0.5 per cent in six out of 10 quarters, as shown in Chart 1. Adding to that, unemployment levels have risen to 6.4 per cent – the highest level in 13 years. Despite its shortcomings, the country has managed to avoid recession for more than two decades.
When the rest of the world was going through a severe financial crisis and most countries found themselves dealing with recession, Australia was in a safe spot due to its trade links with China and its export of iron ore, of which China’s stake is close to 80 per cent. But with increasing signs that China’s growth is slowing – including the Chinese government’s downgrading of growth expectations and interest rate cuts, the question is how does it impact the Australian economy?
“Clearly the recent performance has been disappointing,” says Sean Maloney, chief economist and strategist at Finconomics, adding, “the anticipated pick up in non-mining investment has not come. This is exacerbating the impact of the mining investment declines on the broader economic numbers.”
Statistics from the government explains Australia’s trade relationship and dependence on China. According to the Federal Department of Industry and Science, Australia exported a total of 247,000 kilotonnes of iron ore, the main ingredient in steel. Of this, China’s demand was 129,000 kilotonnes. By 2013, the export figure had increased by 130 per cent to 579,000 kilotonnes and so had China’s stake, which now stood at 441,000 kilotonnes.
The figures explain the importance of trade links with China and thus the Chinese economy slowing down sent alarm waves to Australia. But some analysts think this is momentary and that a mining-led-boom will come back.
“The declines in mining investment may actually be sowing the seeds of another future boom,” Mr Maloney says. “China is normalising to a slower growth profile but if they maintain 6 to 7 per cent growth rate, that is still a major and ongoing spur to Australia.”
He explains that the emergence of other developing nations should be taken into account, especially those countries that are in line to become the ‘next China’.
