Australia's Economy Faces First Recession Since 1990

By Jacob Greber

Nov. 11 (Bloomberg) -- Australia's economy, which cruised through the 1997 Asian financial crisis and the dot-com bust, is facing the prospect of its first recession in almost two decades.

Waning global demand for commodities threatens to staunch a five-year flood of export earnings that helped boost Australian incomes by the most in more than 30 years. Without shipments overseas, the economy would have contracted in the second quarter.

China's performance may be the key to whether the economy shrinks: A slowdown in Australia's fastest growing export market would hurt shipments of iron ore, coal, copper and cotton. Treasurer Wayne Swan said this week Australia may be hit harder than expected as the global slowdown spreads to the emerging markets that are among the nation's main trading partners.

``It'll be no mean feat for Australia to stay out of a recession,'' said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. ``Consumers and business are hunkering down across the world, almost as we speak, shocked to the core by the financial dislocation.''

Australian business confidence plunged last month to the lowest since National Australia Bank Ltd. began measuring sentiment in 1989, the bank said today.

``Fear reigns supreme,'' said Alan Oster, chief economist at National Australia in Melbourne. Share market declines, falling commodities and ``continuing talk of global recession have finally broken business optimism'' in Australia, he said.

Stocks, Currency Drop

The benchmark S&P/ASX 200 Index of stocks sank 4.4 percent at 11:46 a.m. in Sydney, taking its slump for the year to 38 percent. The Australian dollar fell by 4.1 percent to 66.56 U.S. cents from 69.40 in Asia yesterday. The currency has dropped 32 percent since reaching a 25-year high of 98.49 on July 16.

Central bank Governor Glenn Stevens responded to the threat with the most aggressive round of interest-rate cuts since a recession in 1991, slashing the benchmark rate by 2 percentage points to 5.25 percent in nine weeks.

Prime Minister Kevin Rudd plans to pump A$10.4 billion ($7.1 billion) into the pockets of pensioners, first-home buyers and families to boost spending.

The International Monetary Fund forecasts global growth of 2.2 percent next year, a level it has called the ``equivalent to a global recession.''

The Reserve Bank of Australia yesterday cut its forecast for economic growth in 2008 to 1.5 percent from the 2 percent it predicted in August.

Australia is Vulnerable

The slide in global growth ``will be more dramatic than many had thought previously,'' Treasurer Swan said on Nov. 9.

While the government and central bank don't forecast a recession, Australia is vulnerable. Without exports, the economy would have contracted 0.2 percent in the second quarter instead of expanding 0.3 percent.

The drop in global demand has hurt commodities. The Reuters/Jefferies CRB futures index for prices of 19 raw materials tumbled 46 percent since hitting a record on July 2.

The declines could get worse should China's economy weaken.

``If China stops being fine, then Australia runs the risk of being buggered,'' said Chris Richardson, head of Canberra-based research company Access Economics. ``Is there a risk that China won't be fine? You bet there is.''

China's Stimulus Package

China this week pledged a 4 trillion yuan ($586 billion) stimulus plan to prop up growth. Richardson predicts China will expand 7.4 percent in 2009, the weakest pace since 1990. The economy grew 11.9 percent in 2007.

Rio Tinto Group, the world's second-largest iron ore exporter, said yesterday it will cut output at its mines in Western Australia by 10 percent.

Waning commodity prices are forcing miners such as Oz Minerals Ltd., the world's second-biggest zinc producer, and Minara Resources Ltd. to cut jobs. They are also shelving spending on investment, which accounts for about a quarter of gross domestic product, up by about half since the start of the decade, according to Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney.

``All the economy's eggs are in the mining basket,'' said Walters. ``The ripple effects through the economy for the next two years will be massive.''

Economy to Contract

Walters predicts GDP will contract in the six months through March, trimming 2009 growth to 0.7 percent. Unemployment will more than double to 9 percent, he said.

A drop in shipments is also bad news for Australia's indebted consumers. The mining boom fueled a 30 percent surge in household incomes in the past five years, more than any other developed economy, according to the central bank.

Many households used the cash to take on debt, which almost doubled since 1999 to around 160 percent of incomes, a higher ratio than the U.S. and U.K., according to Shane Oliver, senior economist at AMP Capital Investors in Sydney. The median national house price soared about 140 percent in the same period.

House prices fell 1.8 percent in the third quarter and retail sales slumped the most in more than three years last month.

``The average person in the street senses something is wrong,'' said Macquarie's Robertson. ``Households and businesses are pulling in their horns. Whatever people were planning two or three months ago, much of it has been put on hold.''

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net