Tuesday, December 6, 2011 1 comments

Something to watch... Australia potentially slowing down

The Globe & Mail reports on the possibility of Australia slowing down:

The boom Down Under may soon be over.

Australia’s central bank has cut its benchmark lending rate for the second time in as many months, confirming fears that Europe’s debt crisis and a slowdown in China are threatening the resource-driven economy.

The Reserve Bank of Australia lowered its cash rate by 25 basis points to 4.25 per cent, Tuesday. That followed a similar reduction in November.

Much like Canada, Australia was a global leader among developed countries in weathering the 2008 financial crisis. A stable banking system, coupled with demand from China and other Asian nations for its commodities such as oil, iron ore and coal, helped Australia endure the downturn.
Why is this important? Because it could be an early signal to a potential global slowdown.

While about 70 per cent of Australia’s exports are destined for Asia, a struggling Europe and potential collapse of the European Union was also a factor in the bank’s decision to reduce rates.

“The likelihood of a further material slowing in global growth has increased,” Mr. Stevens, said. “China’s growth has been slowing, as policy makers there had intended. Trade in Asia is now, however, seeing some effects of a significant slowing in economic activity in Europe.”

Troubles for Australia’s economy could signal comparable problems in Canada. With a similar sized population as well as a resource-heavy economy, Canada, like Australia, has a lofty property market that has yet to suffer a significant correction.
The  author is quite correct in pointing out that Canada may also suffer a similar slowdown.



The yield curve, courtesy Bloomberg, in Australia isn't exactly inverted; but it depends how you look at it. The short-term yield is higher than the yield all the way up to around 10 years.


Not a classic inverted yield curve so it doesn't exactly signal a slowdown—I'm a big fan of the theory that yield curves portend to recessions or economic slowdowns. Also, I believe the curve has been inverted for a while now, with no slowdown so far.

Stocks tend to be leading indicators so it is also a good idea to check out the stock market. The following chart shows a plot of the Australian stock index (All Ordinaries), an Australia ETF that trades on NYSE (EWA), and the S&P 500 over the last 2 years (note: starting point matters a great deal and I picked 2 years in order to capture any major divergence since the global recovery started. One may draw different implications if they picked a different time period):

In terms of the stock market, the Australian stock market has underperformed the S&P 500 by around 10% this year and around 22% over the last 2 years. I don't follow this market closely so I'm not sure how much of this is due to currency movement (AU$ vs US$) and other issues such as dividends being included in the index.

If you look at the Australia ETF (EWA), which I believe is hedged to US$ (have to check this though) and roughly represents the Australia stock performance in constant-currency terms, it appears Australia has underperformed S&P 500 by around 13% over two years.

Although the media and the central banker seem to suggest problems in Europe are a big worry, I think the bigger issue is China. Australia could easily turn out to be an early warning of any material slowdown in China. So far, the Australian central bank is cutting rates, and the Australian stock market isn't doing that badly. It's worth watching.

Tags:

1 Response to Something to watch... Australia potentially slowing down

February 23, 2013 at 2:10 AM

Great post

Post a Comment