Things Aren't Looking Good In Australia

All's not well in Australia.

Riding on the back of a mining boom, Australia escaped the worst of the financial recession relatively unscathed. But as the Chinese economy slowed and the commodity boom wound down Australia's economy began to falter.

Now, unemployment is at a 12-year high of 6.4%, compared with a low of 4% in 2008.

Some were quick to point out that headline number didn't tell the complete story. "The jump in the unemployment rate to a 12-year high reported last week was more noise than a new trend in the labor market," wrote Carl B. Weinberg at High Frequency Economics. "However, the headline did raise awareness in the markets that the unemployment rate is particularly high relative to recent history."

Matthew Klein at FT Alphaville points out that "the trend is not encouraging." Australia's overall employment to population ratio has fallen by about 2 percentage points since the end of 2010, he argues and that this is in part because of the lack of job growth in mining, but it's largely because the economy has been slowing.

In its August statement on monetary policy, the Reserve Bank of Australia said that mining investment has fallen noticeably from its peak two years ago and has further to fall. Meanwhile, "non-mining business investment remains low relative to its average share of economic activity over recent decades and the Bank's liaison continues to report that firms are reluctant to undertake significant investment projects until they see a sustained period of strong demand."

What's more? Retail sales fell 0.5% month-over-month in May, following a 0.1% decline in April. And the recent rise in unemployment has many worried about the impact on consumer spending.

The growth in real household disposable income has slowed as well, up 1.5% in the year-to-March quarter, compared with 4% over the past decade. "The slow growth largely reflected weakness in labour income, consistent with subdued labour market conditions," according to the report. But wealth has been boosted by higher home and stock prices.

Some parts of the economy are ticking up. Australian manufacturing PMI moving into positive territory in July after eight months of contraction. But Aussie dollar strength has become a cause for concern.

"Many respondents to the Australian PMI expressed renewed concern about the stronger Australian dollar, which has increased import competition and lowered demand and selling prices for locally made products again this month," according to the report. "Meanwhile, wages and input costs continued to grow, placing extra pressure on manufacturing businesses' margins."

John Edwards at the RBA continues to argue that the Aussie dollar is overvalued, which can only hurt an economy that is still heavily skewed towards exports. The Aussie dollar is up nearly 30% against the US dollar in the past ten years, and 4.2% year-to-date.

It's possible that as growth has once again become Beijing's top priority, it's mini stimulus could extend a little support the Australian economy. But we'll be watching Australia's transition from an economy led by resource exports to one led by consumption.

Meanwhile, the RBA has lowered its Australian GDP forecast to 2.5% this year, from its previous forecast of 2.75%. It expects GDP to expand 2.5-3.5% in 2015, down from previous forecast of 2.75-3.75%.