Australian Prospects Downgraded Again

Those who live by the commodity seem to die by the commodity as well. The Australian economy was surging in recent decades on the back of the insatiable demand for iron ore, coal and other commodities produced by the Australian mining companies. But as Chinese demand has started to dry up, the Aussie economy began struggling.

For the second time this year, the government has downgraded economic expectations. The rate of growth is now seen as less than 2.5% and there is an expectation of a far larger budget deficit than had been planned before. The Aussie economy has often been compared to an airplane that has a jet engine on one side and a propeller on the other. The mining sector has ruled for many decades and even now, when global demand is weak, it is the mining companies that are the drivers.

The manufacturing sector is very weak, and services are barely holding their own. The isolation of Australia makes competing in sectors other than commodities hard. Transportation costs can be prohibitive, limiting the markets available to those in the “near north." These nations are not generally in great shape either. The country that Australia most depends on to consume these mining outputs continues to be China, which is lowering demand it contends with its own slower economic growth levels.

The retreat on the budget expectations will trigger some intense debates on what the national priorities, such as spending, should be. The ruling Labor Party made a lot of promises that it will be hard pressed to honor at this stage and that could spell another bout of government collapse and restructuring.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

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