Slowdown of Australia?s economic growth in 2013

Australia?s economic performance has been remarkably good over the last few years compared to most advanced economies. However, GDP growth has begun to slow in 2013.
Analisis Credito y Caución
Madrid - 16-set-2013

Australias economic performance has been remarkably good over the last few years compared to most advanced economies and against the background of a volatile global economy. This was due mainly to the high growth rates of Australias main trading partners in Asia - especially China, which has dominated Australian mineral exports.

However, GDP growth has begun to slow in 2013: through the combined effects of lower Chinese growth rates, decreasing commodity prices of minerals and volatility in financial markets. In addition, various domestic business surveys in June and July 2013 have indicated weaker than average trading conditions, profit expectations and business confidence. After a 3.6% increase in 2012, economic growth is expected to slow to 2.4% this year. In early August, the central bank lowered its benchmark interest rate to 2.5% from 2.7% - a new record low - in an attempt to spur a fresh wave of economic growth, especially in the non-mining sectors. This reduction of the interest rate was the second in 2013, and extends an easing cycle that began in November 2011, when the benchmark rate was lowered from 4.7%.

On the positive side, the volume of bulk commodity exports is expected to continue rising in 2013 and 2014. This should help to sustain the economy, as major mineral and energy projects begin to move from construction to production and export.

The forecast of 2.7% growth for 2014 is more uncertain as the Australian economy is in transition, with a reduction in mining investment and question marks over whether the non mining sector can assume the role of growth engine.


Private consumption losing steam

Growth in private consumption was reasonably good in 2012, at 3.2%. This picked up in early 2013, as falling retail prices led to increased sales. However, retail spending has waned since then, and is expected to grow by only 0.9% this year.

Unemployment was relatively low, at 5.2%, in 2012 but the trend has been upward since the beginning of 2013, with fewer jobs in the mining sector. Unemployment increased to 5.7% in June and July and is forecast to be around 5.6% for the year.

Overall, with continuing poor labour market conditions and only modest growth in household wealth, it seems likely that growth in private consumption will remain below trend, at 1.9% this year, with the possibility of improving to 2.7% in 2014. Last year, Inflation in Australia was relatively low, at 1.8%. Moderate increases are however forecast for 2013 [2.2%] and 2014 [2.7%].


Mining investment has reached its peak

The mining sector has been the driver of high growth in real fixed investment - 7.2% in 2011 and 8.4% in 2012 - but there are clear signs that it is no longer contributing to growth, as mining investment has reached its peak. There are still several major liquefied natural gas [LNG] projects underway to keep mining construction elevated until their completion in early 2017. However, the pipeline of incomplete work continues to decline in an environment of weak and volatile commodity prices.

In addition, interim economic data for Q1 of 2013 indicated weak non-mining sector investment, although business surveys suggest a possible modest increase over the next 12 months. Under these conditions, real fixed investment growth is forecast to be only 0.9% in 2013. A rise in the investment growth rate - to 5.7% - is expected in 2014 but there are risks to this forecast, especially as there are no new mega-projects on the horizon.

The Australian dollar [A$] rose against the US$, as Australian mineral export prices for iron ore and coal increased between 2009 and Q3 of 2011. However, through Q1 2013, despite the fall in mineral prices from the end of 2011, the A$ remained stubbornly - and historically - high for various reasons including increased portfolio investment [as Australia is considered a safe haven], the relative strength of the Australian economy and the gap between domestic and foreign interest rates.

The relatively high A$ hit Australias tourism industry and export demand for its manufactured goods and educational services. Moreover, domestic manufacturing found it difficult to compete against imports: with domestic steel and car manufacturing in particular suffering.

Finally, the A$ started to depreciate against the US$ in May this year, falling by about 10% since then, for several reasons: general upward pressure on the US$; lower expectations for Chinas growth; falling mineral prices; and a drop in confidence in the outlook for the Australian economy. The decline in the A$ is generally seen as a good thing as it should provide some relief for trade-exposed sectors and would help to foster a rebalancing of growth in the economy.

A moderate depreciation of the A$/US$ exchange rate is expected to continue for the rest of 2013 and into 2014, with a further 10% devaluation by the end of 2014: to around US$ 0.83 to the A$. The forecast depreciation partly reflects the expected strength in the US$ as the US economy continues to recover. Adding to this is the A$-specific effect of the slowing of the Chinese economy and lower mineral export prices.


The insolvency environment

Business insolvencies increased sharply in 2008 and 2009, due to the global financial crisis, and have remained at a historically high level since. Insolvencies for the 11 months to May 2013 are at around the same rate as in the fiscal year [FY] 2012 [in Australia the fiscal year start on 1 July and ends on 30 June].

Despite the economys good performance, the high number of insolvencies is the result of continued volatility in those sectors that have been adversely affected by the high A$ and tight loan conditions: including construction, manufacturing, tourism and retail. In addition, the mining services sector is coming under increasing pressure amid lower commodity prices and the fading mining boom.


About Crédito y Caución

Crédito y Caución has been the leading credit insurance provider for Spain's domestic and export sectors ever since it was founded in 1929. With a market share of 54%, for over 80 years the Company has contributed to the growth of businesses, protecting them from payment risks associated with credit sales of goods and services. Since 2008, Crédito y Caución is Atradius Groups operator in Spain, Portugal and Brazil.

Atradius Group is a global credit insurance company active in 45 countries, with has access to credit information on more than 100 million companies worldwide. The global operator consolidates its activity within the Catalana Occidente Group.

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