The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite
An unexpected interest rate cut from Australia’s central bank, triggered by fears of a slowing mining sector, offers Canadians a glimpse of what to expect in the event of a prolonged economic slowdown in China.
For years, Australia’s economy has been powered by China’s strong growth. Because the two countries are so close together, China has been a heavy buyer of Australian iron ore and coal, propelling the Commonwealth country’s economy. Australia’s annualized GDP growth rate is 3.7 per cent, and its unemployment rate is only 5.1 per cent.
But lately there have been signs of a slowdown in Australia’s resource sector, which was a prime reason for cutting the country’s key interest rate by 0.25 percentage points to 3.25 per cent on Tuesday. In a statement, Reserve Bank of Australia governor Glenn Stevens specifically cited fears about softer resource investments, as miners curtail their expansion plans.
“The peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected,” he wrote. “As this peak approaches, it will be important that the forecast strengthening in some other components of demand starts to occur.”
The key message is that mining dollars are slowing, so the central bank wants to encourage spending in other sectors.
Canada’s economy isn’t precisely the same as that of Australia, which is more closely tied to China and does not have a strong energy sector. But both Canada and Australia are heavily into mining, both have strong currencies, fuelled by global demand for resources, and both need solid Chinese growth to offset the anemic U.S. economy and the recession-riddled euro zone.
Evidence of a fallout from China’s economic slowdown has been relatively anecdotal to date, but Australia’s acknowledgment that mining investments are drying up is a reminder that the ripples are spreading. Commodity prices have also taken a hit.
Iron ore and coal are two of Australia’s major exports, and iron prices have dropped by a third since July while thermal coal is near its lows over the past two years.
For the rest of this article, please go to the Globe and Mail website: http://www.theglobeandmail.com/globe-investor/investment-ideas/streetwise/australia-cuts-interest-rate-as-mining-slump-prompts-worries/article4582401/