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Dependence on mining may lead to recession, says Andy Xie by: Andrew Critchlow and Enda Curran
From: The Wall Street Journal July 09, 2012 10:50AM

AUSTRALIA'S economy, driven by a booming mining sector, is among the fastest-growing in the developed world. It has the enviable combination of low unemployment and little debt.
Yet its central bank has cut interest rates. The reason: Nearly every part of the economy outside mining is struggling, and there is fear among some small businesses and economists that if China stops gobbling up Australia's coal and iron ore, the remainder of the economy would be too weak to pick up the slack.

The central bank is hoping to give the rest of the economy a boost. Since November, the Reserve Bank of Australia has cut rates by 1.25 percentage points to 3.5 per cent, even as first-quarter gross domestic product grew 4.3 per cent, its quickest pace in more than four years.

The risk is that Australia will become so dependent on mining that weakened demand could lead to recession. Mining accounts for about 7 per cent of the economy, nearly double its share in 2000, official figures show.

..."The tipping point is once large projects start to be postponed," said Andy Xie, an independent Shanghai-based economist and adviser to several Chinese banks.

Manufacturing, meanwhile, has been in the doldrums for more than a year, and sales of new homes have dropped to the lowest level in more than a decade. Service industries slumped in April, and consumer confidence has fallen to levels last seen in 2001.

The cause of the woes is the mining boom itself, which has made the Australian dollar so strong that other businesses - tourism, retail, and even surfboard makers - are suffering.

"Australia has caught Dutch disease," said Michelle Blauw of surfboard-maker D'Arcy Surfboards, until recently based in the nation's Gold Coast, an area south of Brisbane famed for its surfing.

She is referring to a parallel that economists draw between Australia today and the Netherlands in the 1960s when a big gas discovery drove an inflow of cash that pushed up the value of the Dutch currency. That made it harder for other Dutch industries to sell goods in foreign markets, which hurt the economy.

The Australian dollar has doubled in value against the US greenback over the past decade, as foreign companies bought up the currency to invest in mines. That has made exports more expensive and imports cheaper, contributing to an increase in living costs.

Sydney, the nation's largest city, jumped to No 11 in Mercer Consulting's annual list of the most expensive cities in the world, up three slots for 2011-12.

Internationally known surfboard shaper Stuart D'Arcy, 49, and his partner, Ms Blauw, 42, have crafted boards for 20 years at their Gold Coast workshop. At its peak, their company produced about 2000 boards a year, about one-third of them sold overseas.

But the strong Australian dollar made exporting unprofitable, and an influx of cheaper boards from Asia hit domestic sales.

Mr D'Arcy recently concluded that the only way to continue selling surfboards overseas was to manufacture some in Britain, in the coastal town of Newquay, so that retail prices would be lower in the European market.

At the same time, the rising cost of living is pinching Australian surfboard customers.

Jon McLeay of Chaos Surfboards has a shop and small factory in Brookvale, an area of Sydney known as the Detroit of surfboard making. He said a decline in discretionary spending is hurting the business. "If you've got your bills at home, your wife is not going to let you go buy a surfboard," he said.

Australia's economy is bifurcating. It is thriving along the west coast - thanks to what the government calls a "once-in-a-century mining boom" - and struggling along the east coast. The jobless rate in Western Australia is 3.8 per cent; it is 5.7 per cent in the Gold Coast state of Queensland.

Mines have become a safety valve for some workers. Kayne Ginger, 32, was running a struggling motel in the eastern city of Brisbane. In November, he moved with his wife and three children to Perth, the capital of Western Australia. He now earns $US150,000 ($147,140) a year operating heavy equipment for mines.

"Everything was just petering out," said Mr Ginger of his prior career. "Now, I will be a millionaire soon."

So far, China's demand for resources is holding. Trade data for May showed a 16 per cent monthly increase in Australian iron-ore exports and coal sales falling marginally by 3 per cent.

That reversed a downward trend in the first quarter when the value of Australian coal exports fell 10 per cent and ores dropped 11 per cent, the Australian Bureau of Statistics said.

But a survey by National Australia Bank put business conditions in May at their lowest level in three years, in part because of a slowdown in mining. "The degree of weakening in activity over the past couple of months suggests that the economy is struggling, with conditions in some of the previously strong industries - namely, mining and finance, business, property - also looking somewhat laggard at present," said Alan Oster, the bank's chief economist.

Prime Minister Julia Gillard, suffering from record low support in opinion polls, hopes tighter fiscal measures to restore a budget surplus and a decline in inflation will keep the central bank cutting rates and help win back votes in a general election due late next year.

But so far, the RBA's cuts have brought little relief. The Australian dollar remains stubbornly around parity with the US greenback, just about where it sat when the bank started to cut rates in November.

Reserve Bank Governor Glenn Stevens stressed in a recent speech that Australia's glass is "at least half-full", but for as long as the Australian dollar defies gravity, it will feel half-empty for those Australians not lucky enough to work in a mine.

Additional reporting by James Glynn