(photo credit: REUTERS)
The kind of people you associate with supposedly says much about you. But for countries that supposedly don’t have friends, only interests, a better indicator might be who they share a headline with. On that basis, things are looking really bleak for Australia, which has very recently had the dubious honor of being put in the same breath as Venezuela on Bloomberg TV and even been threatened, in the Daily Telegraph, with becoming “the new Greece.
Even if these headlines are sensationalist, as headlines usually are, matters seem to have gone rapidly downhill since April, when The Economist, in its more restrained style, headlined its discussion of the Australian economy’s growing woes as simply “The Unlucky Country.” As a signal that things were not at all what they used to be – when Down Under was “The Lucky Country” – that headline does a good job. But from there to Venezuela and Greece in three or four months is surely somewhat drastic? The answer, fortunately, is still “yes” – but it is probably already “yes, but.” The driving force behind this change, the factor that justifies the “gone rapidly downhill” description, the keyword in any discussion of the Australian economy, is the one common to and linking those two headlines: commodities.
We are living through an epic commodity crash, which is still getting worse and which is devastating a growing number of countries – or regions within large countries – around the world. Despite the tendency to associate “commodity economies” with “developing countries” or even “poor countries,” the truth is quite different.
Australia, like its nearest neighbor, New Zealand, and like distant Canada, is a developed economy, meaning it has a high income per capita, good government, decent infrastructure, etc. Its people speak English (sort of). They even play cricket and rugby. But all of these countries have commodity economies, to a greater or lesser extent.
Unlike Canada – let alone Texas – Australia and New Zealand are not energy exporters, and their woes do not stem from the crash in oil prices over the last year. They care little for the machinations of OPEC, and the rumblings in the Persian Gulf affect them hardly at all – even Putin’s adventures in the Ukraine and Crimea are not their concern.
Perhaps most remarkably, they don’t even sell remotely comparable products. Australia’s chief commodities are iron ore and coal, although it is also a major producer of agricultural products, including grains and wool. The latter is the one link with New Zealand, to whom wool is relatively more important. But the real deal in Kiwiland is milk and derivative products.
What puts the Aussies and the Kiwis in the same sinking boat is not a common product but a common customer.
For entirely logical and understandable reasons – mostly geographical, but also economic – they tied their fortunes to China. Over the last generation, as the Chinese economy climbed and drove that country from backwardness and poverty to the emerging economic superpower, it seemed that Australia and New Zealand had made the right choice – or perhaps they really were just plain lucky to be in the right place, with the right products, to be able to feed the seemingly insatiable appetite of China’s 1.3 billion people for new infrastructure, more factories, better homes and better-quality food.
But even China’s growth surge, unprecedented though it was in scale and speed, eventually came to an end. For the last several years, the rate of growth has been falling; it is almost certainly much less than the 7 percent per annum claimed by the official data and may even be near or at zero.
The results have been dramatic – and catastrophic for commodity producers around the world.
As the Daily Telegraph article cited notes, “Iron ore is now trading at around $50 per ton, compared with a peak of around $180 per ton achieved in 2011. Thermal coal has also suffered heavy losses, now trading at around $60 per ton, compared with around $150 per ton four years ago.” If those are your main exports, the engines of your economic growth, source of new jobs and primary wealth creator, then you are in serious trouble. If, in addition, you are piling on foreign debt and moving from surplus to deficit in your government budget and trade balance, then your currency is toast and the rest of the economy is in dire straits.
But this is not bad luck. These are the results – arguably the inevitable and entirely foreseeable results – of excessive reliance on one or two sectors and on one major customer for your products. If, in addition, you encourage your citizens to bury their money in bricks and mortar, as part of the Anglo-Saxon real-estate mania, rather than in investments that produce genuine economic wealth, then you are not unlucky at all. You had it made, and you went and threw it away.