Australia: Risk Assessment
Country Rating1
Rating: A1
Business Climate Rating1
Rating: A1
Risk Assessment2
Public spending and raw material exports paved the way for recovery in 2010
Australia avoided a recession during the crisis and recorded very strong growth in 2010 with the economy driven by private consumption, residential investment, public spending, and exports, which benefited from strong demand from Asia for raw materials while prices for iron ore and coal returned to the levels prevailing in 2007.
Large-scale mining investment projects will be the main growth engines in 2011
Without the New South Wales and Queensland floods that occurred at the end of 2010 and at the beginning of 2011, and the negative effects of Cyclone Yasi at the beginning of February, the economy would have grown this year at a pace quite comparable to that recorded last year thanks mainly to investment in the mining sector. Heavy rains that have damaged wheat crops and stocks, deteriorated some coal fields and undermined exports and the touristic activity should remove some 0.5 percentage point from GDP growth. Nonetheless, mining investment, underpinned by historically high terms of trade, should accelerate at the very end of the year by which time many of the projects will take full effect. In this context, the employment picture will brighten again, which will offset the erosion of household purchasing power due to the waning effect of the economic stimulus measures and the limited rise in real wages. But the likely increase in the third quarter of this year in the Reserve Bank of Australia's key interest rates (4.75% since November 2010), intended to moderate demand for property loans, will also undermine household purchasing power: nearly 80% of mortgage loans are granted on a variable rate basis. Households that benefited in 2010 from tax incentives for first home buyers could be the first to suffer from the tightening of monetary policy. Albeit overpriced, property values are expected to continue to rise as a result of the chronic housing shortage in most large cities. In this context, household spending will decline and residential investment will contract sharply.
Exports will grow at a slower pace, undermined by the floods and the contraction of demand from the main advanced economies and from China where the production of iron ore is expected to become an increasingly important factor in the domestic market. Exports (excluding raw materials) will also suffer from the appreciation of the Australian dollar (up 35% against the US dollar between March 2009 and September 2010, followed by a slight fall back due to the floods), which reached parity with the greenback late 2010, eroding the price-competitiveness of Australian manufactured products in the process, as well as touristic services. The trend of the goods and services balance will nonetheless remain favorable.
The fiscal deficit will narrow substantially as a result of the decline in public spending, the additional fiscal revenues generated by the economic rebound and the new tax levied on the mining sector. At 27.5% of GDP, the level of public sector debt is very reasonable.
Bank credit has been slow to recover and bankruptcies have surged
With the preponderate weight of the mining sector in the economic fabric, Australia could run a real risk of a shortage of job offers and capital investments in other economic sectors (like tourism, agriculture, and breeding). Conversely, the colossal investments in the mining sector (such as the liquefied natural gas factory project in Gorgon, which alone calls for a USD 45 billion-investment over five years) and the rebuilding of the damaged infrastructures will benefit the construction and public work sector at the end of 2011. Bankruptcies have only slightly increased in 2010 but they accelerated over the final quarter of 2010 (up 7.7%). Payment delays still exceed pre-crisis levels, suggesting that companies continue to contend with tight cash positions, a trend that will bear watching especially with lending to companies not having recovered the pre-crisis levels.
Strengths
- Mining resources (iron ore, coal) indispensable for global recovery
- Close geographic position to emerging Asian economies
- Sound banking system
- Low public sector debt
- Dynamic demographics
- Geographic features conducive to tourism
Weaknesses
- Heavy household debt — over 150% of disposable income
- Shortage of qualified labor
- Strain on water resources
- High foreign debt — near 100% of GDP
- Vulnerability to the raw material cycle