Deutsche Bank Warns of Australian Recession Risk

One of Europe’s biggest banks on Tuesday warned against the growing risk of recession in Australia in 2013, as prices for commodities such as iron ore and coal spiral lower.

The warning by Deutsche Bank DBK.XE +2.81% comes amid rising concern that Australia’s mining investment boom, which has insulated the commodity-rich economy from a global slowdown, is waning, leading to mine expansions being scaled back and mounting job losses.

Policy makers are “dangerously complacent” about the risk now arrayed against the 1.4 trillion Australian dollar (US$1.5 trillion) economy, which relies heavily on prices paid for its biggest exports—iron ore, coal and gas—for its prosperity.

Australia’s terms or trade, or the difference between what the country is paid for exports and what it pays for imports, may collapse by as much as 15% in 2012, said Adam Boyton, Deutsche Bank chief economist in Australia.

“Over the past 50 years such declines in the terms of trade have been seen only five times. In three out of those five instances the economy entered recession,” he said, adding that there was “overconfidence that the investment pipeline is locked in.”

An investment pipeline valued at close to A$500 billion is expected support economic growth over coming years, but cracks are increasingly showing in the country’s mining industry.

Prices for exports of coal and iron ore have slipped to multiyear lows as growth has cooled in China, the country’s biggest trading partner.

Problems for Australia’s exporters are being deepened by a soaring Australian dollar, which is near 30-year highs as the world’s central banks seek a haven for currency reserves in the country’s triple-A-rated bonds. Calls have gone out for the Reserve Bank of Australia to weaken the currency either through interest-rate cuts or direct market intervention.

Mr. Boyton said a sharp drop in the terms of trade would have immediate consequences for the mining investment pipeline.

“History would counsel some caution on the investment outlook. Indeed, an average response to a circa 15% decline in the terms of trade would see business investment falling in year over year terms by early 2013,” Mr. Boyton added.

The assessment stands in contrast to the upbeat one by the RBA, which earlier this month raised its forecast for economic growth in 2012 to 3.5% from 3.0%.

With confidence flagging, RBA Gov. Glenn Stevens has called on business and consumers to start to seeing Australia’s economic position as a “glass half full.”

The RBA said Tuesday it expected the mining investment boom to peak during 2013-14, but added the timing of the peak was uncertain.

Also Tuesday, corporate insolvencies hit a record in the year to June 30, according to the Australian Securities and Investment Commission. Mining states are among the worst hit, it said.

“We see one of the mining boom states, Queensland, showing one of the most dramatic increases in corporate failures,” ASIC said. “Western Australia’s financial year company failure figure is also the highest on record for that state.”

—Enda Curran contributed to this article (WSJ Online)

Wall Street Journal Online

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell