Australia has over the last two decades enjoyed an enormous economic growth, typically tied to three major industries, the mining industry, manufacturing industry, and the construction industry. According to research conducted by Variant Perception, a contrarian research firm, this growth is unsustainable, and now, the country is at the brink of an economic meltdown.

The Australian economy is one of the few to have endured the global financial crises of 2008/2009 without a setback, having grown consistently over the last decade. However, the economy now looks set to record one of the worst performance within the last ten years.

The graph below is a clear illustration of the manner in which the country’s GDP is driven by the three industries ,with Mining and other sectors way above the rest, followed closely by the Construction Industry, and then the Manufacturing Industry. Additionally, the chart also indicates a falling trend from late 2011, with the construction industry, which is dominated by the Housing sector, leading the fall.

Using a base of 100 for the Australian Capex in 1989, the mining industry has more than quadrupled  during the period, as it now stands at approximately 400, or 400% growth rate, while the construction industry has grown by 250%, with the manufacturing industry pegged at 150%.

Australia capex in various industries 1989-2012 chart

According to Reuters, the country’s mining boom now appears to be fading, and China, which accounts for more than 50% of Australia’s exports, is experiencing economic slowdown. Iron ore is the country’s largest export and accounts for approximately 25% of the to total exports realized during the period ended May 2012, which stood at AUD 22.5 billion.

The cost of mining is also on the rise as the increasing cost of the USD/AUD continues to worsen the situation. Indeed, Variant Perception is of the opinion that, in order to restore, or at least sustain the current growth, the country’s currency must weaken, or alternatively, RBA must improve on liquidity within the economy.

Meanwhile, china’s economic slowdown is also very well depicted by the decline in its iron ore imports, thereby putting more pressure on Australian economy.

 

China and australia trade of iron ore charts

 

The banking sector also stares at yet another possibility of following in the footsteps of the Euro Zone. More than 59% of the bank loans are attributed to housing related credit, and this poses a great danger to the sector, as a slowdown in the housing industry appears on the horizon.

Additionally, the banks rely so much on external funding, as depicted in the chart below; they held approximately 45% of the country’s total gross external debt. The general government debt is rated at 17% of the total debt, while direct inter-company investments account for 12%.

A collapse of the housing industry could trigger one of the greatest crises the country has ever faced, as financiers could look to recoup their funds, thereby putting more pressure on the banking industry.

Additionally, the banking industry in China is more of an oligopoly, with the four biggest banks, Commonwealth Bank of Australia (WBA.AX), Westpac Baking Corporation (WBC.aX) (NYSE:WBK), National Australia Bank Limited (NABCD.AX), and Australia & New Zealand Banking Group Limited (ANZ.AX), dominating the market. Therefore, a collapse of the housing industry could easily sweep across the banking industry.

Australia external debt by agency

 

The driving force behind the superb performance of Australian equities has come from two sectors, namely, the mining sector and the energy sector. For instance, taking a base rate of 100 points in 2001, the mining industry has consistently outperformed this mark by at least 100% on average. We will discuss more on the Glencore International Plc (LON:GLEN) bid for Xstrata PLC (LON:XTA) in a later article.

A slump in Chinese economy could result in an equivalent impact on the Australian equities, or even a compounded impact. The Chinese economy has also been under pressure recently, and it too is linked to Europe. The country’s economic growth was registered at 7.5% in the most recent statistics, falling below the 8% mark for the first time in 5 years, bar 2009 out.