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Australia: Strong Exports and Growth 

The Australian dollar’s appreciation over the past few months against its major counterparts will no doubt remain a source of concern for the RBA which chose to devalue its currency in order to boost the export of Australian goods and services. The Australian economy performed well over the second half of 2015, as well as over the first half of 2016. Gross domestic product expanded 3.1% annually in the three months to the end of March 2016, thanks to a strong pick-up in resources and services exports, as well as, from household spending which saw its biggest expansion in three years.

The country’s economic annual growth rate is currently at 3.3%, (second quarter of 2016) which is relatively strong. However, the Australian economy expanded 0.5% quarter-over-quarter in the June quarter of 2016, slowing from a downwardly revised 1.0% growth in the previous quarter and slightly below market consensus of a 0.6% growth. That was the weakest growth since the second quarter of 2015. 

The last year, there was firmer evidence that non-mining sectors were recovering. Australian business conditions rebounded strongly over the last few months while confidence levels held steady, providing evidence that Australia’s non-mining recovery strengthened further in the early parts of 2016. In addition, growth in gross domestic product for the second quarter was supported by continued growth in government consumption expenditure (public investment) and in household, which contributed 0.3% and 0.2% points to growth respectively.

However, exports have weakened significantly – but still remain on an upward trend – since March 2015. As we can see in figure 1, exports picked up aggressively following the global financial crisis of 2008 and continued to grow until 2015. For the last eighteen months, exports, as well as imports, started to weaken significantly. It should be noted that Australia has been running a consistent trade deficit since 2014, following a 2-year period of deficit – between 2012 and 2014.

Figure 2 AUD, Bulls, Back, Command, For How Long,, Currency Analysis, fx trader, forex

Figure 1. Australian Exports vs Imports

Terms of trade in Australia – a measure of the relative value of exports compared with imports – have fallen more than 30% since mid-2011, and export volumes of iron ore, which accounts for 25% of the total exports, and other mining and metals, are gathering ground as the end of the mining boom draws near. The mining industry’s contribution to the Australian economy is more than $121 billion a year. In terms of export income, it generates $138 billion per annum, which represents over half (55%) of total goods and services. Mining has been the driving force of Australia’s economic growth for longer than anyone cares to remember – helping GDP growth average 3.5% a year for most of this century.

fig 3 AUD, Bulls, Back, Command, For How Long,, Currency Analysis, fx trader, forex

Figure 2. Australia’s Top Export Products and Destinations

Iron Ore Recovers But Still Cheap

The plunge in iron-ore prices is hitting Australia’s economy harder than expected, as iron ore has been in decline since 2011, despite the recent recovery above $50.00. The raw material is headed for a fourth annual decline and has lost more than 90% since peaking in 2011, at around $192.00. Iron ore has been plunging as a slowdown in China’s economy - its largest buyer - hurt demand for it. After four years of sliding prices, iron ore advanced in 2016, but how strong the recovery will be, however, remains uncertain.

The world’s two biggest miners, BHP Billiton (ASX: BHP 20.50 AUD) and Rio Tinto (ASX: RIO 48.16 AUD), reported that net profit fell by almost half in 2015. BHP Billiton reported that net profit fell by more than 47%, to nearly $4.3 billion, in 2015 due to lower iron ore prices. Smaller Australian miners like Arrium Limited Inc. and Tiger Resources Limited suffered huge damages as these small firms need iron ore prices above almost $90 to maintain profitable margins, but the benchmark price is currently trading at just above $50, so it still has a long way to go.

Fig 4 AUD, Bulls, Back, Command, For How Long,, Currency Analysis, fx trader, forex

Figure 3. Iron Ore

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