World Economy

Recession Fears in Australia

Recession Fears in AustraliaRecession Fears in Australia

In a shopping center full of sale signs in Broadmeadows, a Melbourne suburb with 27 percent unemployment, Soney Kul is struggling to shift half-price jewelry.

“People don’t want to spend,” the 27-year-old said, gesturing at the sparsely-filled display cases in his family-owned store, Altinbas. “They’re too scared to spend because they don’t know what the next day will hold.”

After a decade-long mining boom powered by Chinese demand, Australia’s economy is falling back to earth fast. Among the worst hit are industrial areas like Broadmeadows, whose Ford Motor Co. plant will shut after a record-high currency made operations untenable, and the slowdown is spreading. Only four months after economists were forecasting interest-rate increases in 2015, the country’s central bank has cut its benchmark to a fresh record low.

Goldman Sachs Group Inc. estimates a one-in-three chance Australia will fall into recession in the next 12 months while a Bloomberg survey of economists shows the probability of a contraction has risen in recent months.

Recession Risk

Businesses drew little comfort from the lower rates with National Australia Bank Ltd.’s index of confidence falling to about zero in February from 3 points in January, its lowest level since before the Liberal-National coalition government was elected in 2013, according to the bank.

Combined sales at the Broadmeadows shopping center were down 13 percent in the 12 months through June compared with three years earlier.

While most economists see only an outside chance of a recession in Australia, the probability of a contraction has risen to 18 percent in February from 11 percent in August, according to a Bloomberg survey of 11 analysts.

Australia’s jobless rate stands at a 12 1/2-year high of 6.4 percent and there are a growing number of pockets in the nation where it’s much worse. Suburbs like Broadmeadows and Elizabeth in South Australia are dominated by manufacturers that received little benefit from China’s surging demand for raw materials, while suffering the fallout from an overvalued currency driven up by the commodities boom.

Across Australia, regions with unemployment of 10 percent or more of the workforce rose to 13.3 percent of all areas in the third quarter from 10.9 percent of the total a year earlier, according to government data released in December.

In response, the central bank cut its benchmark interest rate last month for the first time in more than a year, saying growth would stay “below trend” and unemployment peak at a higher level for longer than it previously expected.

Spending Drops

Households and businesses aren’t spending as their earnings are barely growing. Real net national disposable income for each Australian hasn’t been above a peak set in the third quarter of 2011 at any time since then – the longest such stretch in 21 years.

Consumer confidence, which fell 1.2 percent in March from a month earlier, has been in pessimistic territory for 12 of the past 13 months, according to an index compiled by Westpac Banking Corp. Households are now paying down their credit cards at a record rate.

The outlook isn’t all doom and gloom. A 30 percent decline in Australia’s currency since it peaked above $1.10 in 2011, and smaller wage gains are helping to better position domestic producers against imported goods. The local dollar traded at 76.40 US cents at 10:54 a.m. in Sydney.

Australian labor costs, which were higher than any Group of Seven economy when Ford announced the planned closing of its Broadmeadows plant in 2013, are now lower than in every G-7 country bar Japan, Canada and France, according to data from the Organization for Economic Cooperation and Development.