The ‘Lucky’ Australia

When the late Donald Horne called Australia the ‘Lucky Country’ in 1964, it was meant as an insult. But today, I guess the insult turns blessing simply that this country is sitting on a pile of valuable natural resources. She is the prime beneficiary of that new reality to global wealth.

Just after 2005 – the rise in those global commodity prices as well as the insatiable demand for raw materials from China and India that combined to fundamentally change Australia’s competitive position. It has since developed into a commodities powerhouse and is now the principal source of raw materials from the immense Chinese industrial engine. Last year, China’s automobile market leapfrogged the US market to take over the No. 1 spot in the world for the first time ever and it is growing at better than a 20% annual clip.

China needs particularly iron ore for its rapidly expanding steel industry and coal for its power stations. There is a ‘double-whammy’ effect on the Australian economy. While now there is no danger of inflation and the strength of the AUD up 22% on a trade-weighted basis last year, but the Reserve Bank of Australia has raised short-term interest rates five times in the last seven months, taking rates from 3% to 4.25%. Key fear is an asset bubble with home prices up 13% last year on an already inflated market and the stock market up 60% since its lows of last March. Australian consumers are spending like there is no tomorrow – a propensity they share with their cousins in the United States.

The situation is made more dangerous by the Australian budget deficit. At 4.7% of GDP for the fiscal year ended June, this is modest compared to the US deficit but it still represents an addition to the problem rather than solution.

With money pouring in from foreign investors, consumers are not saving adequately and the state also spending more than it takes in. Monetary tightening is not enough and the challenge remains with the ability to eliminate the budget deficit as quickly as possible.

Despite this, investors really cannot afford to avoid this economy especially it continues to increase its importance to the overall global economy.