Aug 06 2019
Fear is infiltrating the global economy, following several major upheavals over the past week. Following the United States imposing further tariffs on Chinese goods, and the historic devaluation of the Chinese Yuan overnight, uncertainty is wreaking havoc on financial markets. In Australia, the deteriorating global economic environment is compounding worrying signs in the domestic economy, signalling storm clouds on the economic horizon.
- A risk averse environment has led to surging demand for gold and bonds.
- Slowing Chinese economic growth may threaten the Iron Ore Mining industry.
- Domestic spending continues to slow despite the recent stimulus of tax cuts and interest rate cuts by the RBA. The performance slump in the Motor Vehicle Dealers industry reflects this trend, with new vehicle sales falling for the 16th consecutive month in July. In addition, the parent company of retailer David Jones recently announced a significant writedown for the current financial year.
China coughs and Australia catches a cold
Rapid economic growth in China is the primary reason why Australia has not had a recession in 27 years. However, this economic miracle may be coming to an end. Chinese economic growth slowed to 6.2% in the second quarter of 2019, the slowest rate since 1992.
‘This trend represents a major threat to Australian commodity exporters, particularly firms in the Iron Ore Mining industry, which is highly reliant on Chinese Iron and Steel Smelting. The price of iron ore has slumped this week, as rising trade war fears have undermined expectations for future steel demand,’ said IBISWorld Senior Industry Analyst, Jason Aravanis.
According to IBISWorld, this price slump presents a major threat to Australian producers, including Rio Tinto, BHP Group, and Fortescue Metals Group. In addition, the future reactivation of some iron ore supply from Brazil following a supply cut last year may also threaten the industry. ‘Although the trade war is a threat to future economic growth, some stakeholders may benefit from the disruption to global supply chains. The Australian agricultural sector is expected to be one of these beneficiaries,’ said Mr Aravanis.
In response to the Trump administration’s latest round of 10% tariffs on $300 billion of Chinese imports, China has suspended its purchases of all agricultural products from American farmers. IBISWorld expects this decision to increase China’s reliance on Australian agricultural producers, particularly soybean producers in the Grain Growing industry. This decision may provide some welcome support to the agricultural sector, given the struggles Australian farmers have experienced with drought in recent years.
Major Australian agricultural exports to China
Safety of a kangaroo’s pouch
The global financial environment has become increasingly strained over the past two weeks. Although financial markets were supported last week by the United States Federal Reserve announcing a cut to interest rates for the first time in a decade, this decision has been quickly offset by trade war fears.
‘The price of gold, an indicator of investor demand for low-risk wealth storage, has surged to a six year high above US$1,450 per ounce. This result is particularly beneficial for the Australian Gold Ore Mining industry given the depreciation of the Australian dollar. As a result, gold sales revenue has been rising while costs denominated in Australian dollars have remained steady. Australian gold prices reached an all-time high of $2,181 per ounce on Monday,’ said Mr Aravanis.
According to IBISWorld, demand for Australian bonds has also surged following a global flight to safety. Investor demand for Australian 10-year treasury bonds has surged, as they are deemed a safe asset in periods of economic uncertainty. The resulting increase in price has caused the yield of these bonds to fall below 1% for the first time.
Not quiet on the domestic front
Amid troubling global economic indicators, the Australian economy is also faltering due to domestic issues. IBISWorld research indicates that consumer sentiment is weakening, despite the recent stimulus of tax cuts and the Reserve Bank of Australia cutting interest rates.
‘A performance slump in the Motor Vehicle Dealers industry is persisting, with sales of new vehicles falling for the 16th consecutive month in July, relative to the same month in the preceding year. A possible recession in the retail sector has also shown no sign of abatement, highlighted by the parent company of David Jones announcing a significant writedown last week,’ according to Mr Aravanis.
The global economy is entering a sustained period of uncertainty, in which Australia may struggle to protect its own economic prosperity. As trade negotiations between the United States and China have collapsed, it has become apparent that the economic environment may worsen before it gets better. The Australian economy may struggle to generate growth given rising uncertainty among both consumers and businesses, as both consumption and investment falters.
IBISWorld reports used to develop this release:
- Iron Ore Mining
- Iron and Steel Smelting
- Grain Growing
- Gold Ore Mining
- Motor Vehicle Dealers
- Rio Tinto
- BHP Group
- Fortescue Metals Group
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3641
Mobile: 0422 773 995