The Malaysian Insider

SYDNEY, Jan 24 — Australia is staring down the barrel of its worst export slump in 50 years and a bigger shock to the nation's terms of trade than any time since the 1997-98 Asian crisis.

The nation's top 10 trading partners are in the middle of, or entering, an economic meltdown, with Western and Asian economies entering a cycle of contraction that experts fear could mean up to five years of flat global growth.

The next shock to the Australian financial system is expected to come when contract prices for its exports, particularly iron ore and coal, are renegotiated. The nation's terms of trade — the difference between export prices and import prices — hit record highs last year thanks to the seemingly endless commodities boom. But the news from Asia — the destination for more than half its exports — hasn't been good this week.

UBS economist George Tharenou told The Weekend Australian: “The main near-term weakness is going to come through export terms of trade. There will be a considerable fall from the second quarter onwards when bulk commodity price are renegotiated downwards.''

Export figures for the last quarter of last year are also shaping up as the worst for 50 years. “Fourth-quarter 2008 and first-quarter 2009 exports volume will be weak. We are expecting exports in them to fall by 5 per cent for (the December quarter),'' Tharenou said.

If this is correct, it will be the worst for the past 50 years, beating the 4.8 per cent fall in the third quarter of 1997 as the Asian currency crisis hit Australia.

The most important terms-of-trade negotiations — the iron ore price talks with China — have been brought forward by Australia's biggest miner, BHP Billiton. Analysts expect prices for iron ore and other minerals to come down between 30 and 50 per cent. This would bring the terms of trade to levels of two years ago but the negative shock will be in the swing from last year's large increases — almost 80 per cent for iron ore — to sharp falls.

The growing problems for Australia's exports markets, and the flow-on effect to the broader economy, were underscored this week by an avalanche of worse than expected economic data from the region — the destination of most Australian exports. China, Korea and Japan alone take 42 per cent of Australian exports. Figures this week revealed China's growth had slowed from 9 per cent to a seven-year low of 6.8 per cent in the December quarter. Japan is already in recession and Korea probably is too.

“Realistically it will be a bad first half across the region,'' said Macquarie Securities chief Asian economist Bill Belchere. “It will probably flatten a bit in the second half and then bottom.''

But he warned that the bottoming could last some years. “There could be three to five years perhaps before the global economy does hit potential growth,'' Belchere said. He said there were deep structural problems with Asian economies being geared to consumption in OECD countries that had now dried up.

This week's figures have confirmed the worst fears of analysts, who now see few signs of recovery this year.

“The outlook for the global economy continues to deteriorate,'' Citi global chief economist Lewis Alexander said. “Incoming data have, almost uniformly, surprised on the downside.

“A combination of declining wealth, notably higher uncertainty and financial disruptions appears to have led to sharp declines in demand around the world.

“A significant contraction in international trade is helping to propagate these shocks around the globe.''

Alexander said that sharply contracting output was likely to lead to further declines in demand as income falls rapidly.

“There are scant signs that the momentum of this negative cycle is waning,'' he said. “It's hard to fathom the breadth and depth of bad news that is now pouring forth from north Asia particularly, as well as other major economies across the region, such as Taiwan, Singapore and Malaysia.''

Australia biggest two-way trading partner — China — has grabbed headlines this week as its growth fell off a cliff. But the problems are a lot worse in other countries.

The economy in South Korea, Australia's No. 4 trading partner, grew just 2.5 per cent over the whole of 2008, the slowest pace since the Asian financial crisis of 1997-98, after it contracted an astonishing 5.6 per cent in the December quarter.

Only last month the South Korean central bank forecast 2 per cent growth this calendar year but a contraction of 1-3 per cent is now widely expected.

“Domestic demand was the clear drag in (the fourth quarter) and will likely continue to keep growth down in (the first half of 2009),'' a Credit Suisse report said yesterday. “In our view, a rapid recovery seems unlikely until visibility of global demand improves.''

Japanese exports fell by a record 35 per cent in December as demand for imports, including Australian raw materials, continued to slide.

“Import volume was indeed down from a year earlier for each of these categories and, with commodities prices having plunged so steeply since mid-2008, we expect lower prices and weaker demand to translate into year-on-year declines in import value from April 2009 onwards,'' Credit Suisse economists said.

Malaysia is viewed as one of non-Japan Asia's most vulnerable economies to the global economic downturn. Malaysia is also indirectly but heavily exposed to falling commodity prices and falling tourism arrivals.

The flow-on effects as Asian markets seize up, punching gaping holes in Australian exports markets, will be by way of a massive pay cut in terms of national income. “The record terms of trade has been boosting nominal gross domestic product, meaning things have felt a lot better,'' Tharenou said.

“Now, there will be less money sloshing around from corporate profits and taxation. This will mean no budget surpluses, less money for tax handouts and the possibility of a budget deficit position.''

This will trigger cuts in export-associated industries as resource and mining companies slash jobs, flowing on to less demand for general consumables and housing.

“The trickle-down effect will be that there is less national income available and that will feel like a pay cut for the economy.''

Still, some analysts suggest that it is not a relentless picture of doom and gloom, especially from China.

Credit Suisse China analyst Dong Tao said the most important figures released by China this week were not the GDP numbers but those for industrial production. These reported 7 per cent growth in December compared with the same month last year, up from 5.4 per cent in November.

“This is consistent with our call that production growth might be bottoming,'' Tao said. “We do acknowledge that this is a minor rebound from an extremely low level, but nonetheless the rise is significant. We suspect the rebound is largely caused by a slowdown in inventory correction in the materials sector after a drastic change in price expectations on commodity prices.'' — The Australian