Elizabeth Knight of the Sydney Morning Herald said, “The soft landing is over. Now it’s a painful thud.” Australian house prices fell 1.3% in July, according to CoreLogic. Sydney is down 2.2% for the month, down 5.2% from its January peak. The local market is ‘plunging’ at the ‘fastest pace in 40 years’.
The reason is rising interest rates. The central bank, the Reserve Bank of Australia (RBA), is ‘catch-up’ at ‘warp speed’ as it started to tighten monetary policy ‘too late’.
Tight monetary policy has weighed on equity markets, with the benchmark S&P/ASX 200 index down 7.5% year-to-date. Still, it outperforms many other developed markets, reflecting its heavy weighting in commodities, which make up more than one-fifth of the MSCI Australia index.
Australia’s central bank raised interest rates by 0.5% to 1.85% in early August. That shows “a 175 basis point rate hike since May is impressive,” Wayne Cole told Reuters. With “the lowest unemployment rate in 48 years,” the central bank believes the economy can withstand the pain.
Bloomberg’s Swati Pandey says the RBA shouldn’t be overly optimistic. The household debt to income ratio hit a record high of 187%. Rising mortgage rates will weigh on household budgets, and a plunge in the country’s A$10 trillion (£5.8 trillion) housing market will further unsettle consumers.
Goods provide good health
Inflation remains at a 21-year high of 6.1% a year, but Australia is one of the few wealthy countries to benefit when commodity prices soar. The country’s trade surplus hit a record A$17.7 billion in June. “Metals revenues were up 27% in June, grains and grains revenues were up 21.1%,” Pandey said. Australia has enjoyed a monthly trade surplus since her 2018 due to strong demand for iron ore and coal.
Capital Economics’ Marcel Thieliant says trade should add a significant 1% boost to GDP growth in the second quarter. About three-quarters of Australia’s exports are ‘broadly defined as commodities’, says Yahoo Finance’s Stephen Koukoulas. The country is a major global supplier of iron ore, liquefied natural gas (LNG), coal, gold and ‘meat and grains’. The problem is that this dependence exposes Australia to volatile commodity markets.
Australia ranks 91st out of 133 countries in the Economic Complexity Atlas, “just behind Kenya,” said InnovationAus’ Brandon How. The data, published by the Harvard Kennedy School of Government, measures the “number and complexity of products” a country exports. Japan is at the top and the UK is her 10th. Due to Australia’s focus on commodities, it is notable that “income levels are less complex than might be expected”.