When the Chinese economy roared out of the gates and onto the global stage, its major trading partners were the envy of the world. Australia, with approximately a quarter of its total exports going to China, was one of the lucky few. However, as the initial Chinese sprint slows to a trot, the close trading ties Australia boasts have turned from an advantage into the country’s Achilles heel. Among the industries hardest hit in this economic slump is the mining sector. Iron ore makes up the bulk of total exports in goods and services at 20%, with coal a close second (11.6%). Both commodities have seen tightening margins as prices dip in response to falling China construction activity. The near future is set to get worse still. The World Steel Association forecasts for Chinese steel consumption in 2016 to dampen further by an additional 2%. Investment spending by mining companies paints a similar picture, with capital expenditure falling 10% in Q3.
In view of its heavy reliance on resource exports, the economy has attempted to diversify into a broader base of non-mining sectors. Services, manufacturing and rural exports have come to account for a larger proportion of total exports in the 2014 – 2015 period. Education-related travel services and personal travel services, two of the largest segments, grew 14.5% and 6.4% respectively.
On the domestic front, household consumption also looks to be contributing to the recovery effort, increasing 2.7% from the previous year.
The willingness to spend has perhaps been fuelled by confi dence in improved employment data. Australia’s unemployment rate saw a surprise decline in October, falling to a 5-month low of 5.9%.
In light of recent stability, the Reserve Bank of Australia (RBA) has been content to take a measured approach with its monetary policy. However, strengthening economic conditions so far have come on the back of accommodative Australian Dollar exchange rates. Caution should hence be exercised as fl uctuations of late have driven divergences between the currency and the RBA Index of Commodity Prices.
While development of the non-mining sector has sparked progress in the correct direction, change of such magnitude will take time. For now, the health of the Australian economy remains very much pegged to its resource exports. A drop in commodity prices should thereby see the AUD follow lower. Prolonged deviation could see the RBA step in to right the currency’s path or risk back-pedalling of its economy