Chart of the Week: As Australia Moves into Autumn, Economy Also Shows Signs of Cooling Down

March 12th, 2012 by

The ripple effects of the current economic slowdown that began in Europe are now being felt as far away as Australia, thanks to the slower pace of growth in China, one of Australia’s key markets. The result, as can be seen in this week’s Chart of the Week, is that the country’s GDP growth seems unlikely to bounce back above the remarkable average rate of 3.6% that it has sustained since 1960.

Refresh Chart   Edit Chart

To be sure, many European nations would be only too delighted to report positive economic growth these days, and downright ecstatic to have been able to announce that their GDP grew 2.3% in 2011. Meanwhile, economists in the United States are scaling back their forecasts for US GDP growth: forecasters who until recently were calling for that figure to hit 2% now are revising their targets down to 1.8% or even 1.5%. But for Australia – which has an astonishing track record of uninterrupted GDP growth for the last two decades – the prospect of slower growth in China and a consequent slackening of the rate of growth in demand for raw materials that Australia produces and China needs (such as iron ore and coal) will take its toll on the Australian economy.

The warning signs were reinforced last week with the news that fourth-quarter GDP grew only 0.4%, compared to analysts’ expectations that it would grow at twice that rate. Growth calculations for the third quarter of 2011 were revised; the new figure pegs it at 0.8%, rather than the initial forecast of 1%.

The Reserve Bank of Australia historically has been very skilled at managing the vagaries of global economic cycles, particularly those involving commodity prices. Now investors are betting that a third cut in key interest rates is in the offing, after the GDP data disclosed weak consumer demand at home. Household spending edged up only 0.5%, the weakest gain recorded since early 2010, while the homebuilding sector’s 3.9% decline contributed to the lower rate of economic growth.

The relatively high value of the Australian dollar – one of the world’s most actively traded currencies – had been on a tear this year, with traders betting that the country’s economy would do better. That has, ironically, curbed growth by pushing prices of Australian exports higher and making Australians more likely to spend their summer holidays abroad than at home, reinvesting their income in their home country. The weak GDP report, however, triggered a selloff in the Australian dollar, sending it back down to levels last recorded in late January.

As the economic consequences of the eurozone’s woes continue to spread around the world, taking a different form in each region and with different consequences for local businesses and policymakers, we’ll continue to monitor this and bring you the highlights in each week’s Chart of the Week, designed to bring to your attention those economic themes making news and driving investment decisions.

Learn more about how Datastream can help you better analyze macro data and quickly identify data trends and relationships. Request a free trial today.