Australia: Strong, But Challenges Ahead?

Peter Lavelle at foreign exchange specialist Pure FX - 12.07.2012

You might say it's been 'All quiet on the antipode front' this week, if you were to look at the Australian dollar. It sits at 1.52 against the UK pound, unchanged since last week, and its highest point against the embattled UK currency since March. (Of course, this undersells the rapid climb of the emu dollar in recent years. It's gained some 60% against the pound since 2008.)

Yet in this case, this just goes to show that sometimes the foreign exchange market is not an accurate indicator of what's been happening in the world. Because, though the Australia dollar to pound has been still as the surface of a lake, it's been all go both in the Australian economy. It just so happens that these events are of a long-term kind, and so not likely to reflect on the foreign exchange rate just yet.

Unemployment: on the rise, or just a blip?

In Australia, the big news has been a 0.1% climb in the unemployment rate to 5.2%. This is in line with markets forecasts, and means that some 29 thousand fewer jobs exist in the economy as of June, compared to a month before.

The question of course is: does this signal the beginning of a long-term trend, or is it just a blip in Australia's otherwise sterling success story? This depends (of course) on who you ask.

Commenting on the figures, Australian Prime Minister Julia Gillard has said: "What that means is, by the standards of the world we continue to have a low unemployment rate."

In one sense, this is hard to argue with. Unemployment in the Eurozone currently stands at 11.1%, climbing as high as 50.0% in Spain for people under 30. In both the US and UK meanwhile, it sits above 8.0%. In other words, a 0.1% climb in the unemployment rate in Australia is piffle: they still have the most enviable job market in the first world.

But you could also argue that Ms. Gillard has avoided the issue (imagine that: a politician avoiding the issue!) Because, though she's right to look on the bright side, the question concerning economists is: does this signal the Australian labour market is due for a downturn?

This is less clear cut. Most of the job losses last month came not from mining, but sectors that have been hit by the strong Australian dollar. This means manufacturers (who can't export, if international customers can't afford their products) and tourist agencies (who can't attract business, if people can't afford to come to Australia.)

Speaking on this, Employment Minister Bill Shorten said: "We also note that the news is in fact mixed. Some states are the same token, Western Australia continues to have high employment numbers." In other words, though mining in Western Australia continues to go a mile a minute, regions not blessed with buckets of coal and iron ore are having a harder time of it.

This suggests that, unless the Australian government takes action to subsidise these troubled sectors, or hands everyone that used to work in tourism a pick-axe and tells them to get digging, the unemployment rate could soon climb again.

Of course, last but not least, you can also argue that it's foolhardy to draw too many conclusions from one month's data. This is a point made by HSBC chief economist Paul Bloxham: "The unemployment rate is still below the peak level it reached in August last year."

So what then, if Australia's unemployment rate has climbed 0.1%? It's climbed before, and in the not too distant past. It can also fall again therefore. That is probably the best stance to take overall.

Time to diversify Australia's trade partners?

Elsewhere though, there have been more troubling tidings for the Australian economy this week. This concerns Australia's trade balance. It fell to -$285 AU million last month, against forecasts for a -$500 million deficit and $-26 million last time.

On the one hand, the deficit was -$215 million beneath estimates, telling us that Australia's economy did a lot better than expected. Yet, this is the second consecutive trade deficit on the trot, following the -$26 AU million the month before.

Given that Australia is enjoying a once-in-a-century mining boom, this is exactly the time it should be in surplus. It's hence not good news.

What accounts for these deficits? Some blame must be laid at China's door, which is going through a sudden slowdown at present. And, as IG Markets analyst Cameron Peacock notes, "The whole Australian economy and the strength of it is predicated on a strong China." China is Australia's biggest trade partner by a long shot. Without them, Australia has almost no fizz to keep its economy on track.

Of course, this is not to say the party's over for the mining boom. But it does send a signal that Australia shouldn't lean on China for support too much. It would be wise to seek alternative sources of revenue, given that the Asian Tiger is clearly not immune to the global slowdown.

In a good position, but challenges ahead

That about sums up the biggest events in Australia's economy this week. I think it's fair to say that the antipode nation continues to face today's global challenges from a position of strength. Its unemployment rate is at the bottom of the pile (or should that be top?), it's expanding at a faster pace than any other developed nation, and it enjoys a trade alliance with the country poised to become the world's most powerful.

That of course is not to say it doesn't face difficulties. But as I've argued before, economically speaking, you'd want to be in Australia more than almost anywhere else in the world right now.

Anonymous, 'China's economy slowing but revival ahead: think tank,', 12th July 2012.
Anonymous, 'Economy sheds 27,000 jobs in June,', 12th July 2012.
Anonymous, 'Stocks extend slide on China concerns,', 12th July 2012.
Chris, 'Australia the next Spain?', 12th July 2012.
Evan Schwarten, 'International investors could keep AU$ high,', 12th July 2012. Lanai Vasek, 'G20 leaders envy Australia's economic story,'', 12th July 2012.

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