Submitted by Alex Gloy of Lighthouse Investment Management [10]
The 2-Product, 2-Customer Wonder Called Australia
Australia is the sixth-largest country (2.9m square miles) on earth, just a tad smaller than the contiguous United States (3.1m). They are a little short on people (22.8m), which comes handy, since they dig up their entire country and sell the dirt to China.
Australia has a remarkably low government dept-to-GDP ratio (29% ), low unemployment (5.2%), a moderate budget deficit (3.4% of GDP) and moderate inflation.
However, Australia has been running current account deficits of up to 6% of GDP for more than 50 years. The “mates”, until recently, didn’t like to save, hence most investment has to be financed by borrowing from foreigners.
I was curious as to how much of the success was due to exporting dirt to China. From the Australian Bureau of Statistics you get the following data about their top-10 export markets (accounting for 82% of all exports):
A bit more than half (50.2%) of all exports go to two countries: China and Japan. If you stripped out those two, there wouldn’t be much growth left.
The dependence on China and Japan has doubled over the last decade:
[11]
Over the last 12 months, total exports grew by A$ 35.6bn. Of that growth, 24.2bn, or 68%, came from China and Japan.
Let’s look at exports by product. Here are the top-10:
[12]
Two products (iron ore and coal) account for 47% of all exports.
Australia is a 2-product, 2-customer wonder. If either China or Japan has a problem, so does Australia.
To import a car (let’s say 2 tons, $30,000), Australia has to export 214 tonnes of iron ore or 248 tonnes of coal, leading to unfavorable the terms of trade.
As Scott Grannis [13] recently pointed out, the Australian dollar trades far above its purchasing power parity:
[14]
Putting all eggs in one basket will come to haunt Australia once Japan and China collapse under the weight of their debt. A much lower Australian dollar would then be needed to make other goods attractive for exporting.