1 Major Threat to Australia's Economy

Australia’s booming economy may be about to go bust. Here’s why.

Feb 1, 2014 at 8:10AM

Australias Economy

Source: Wikimedia Commons, Car money. 

Australia's economy is the 12th largest in the world and in the past five years, its GDP has shot up 65%. But bigger isn't always better, and there's one major threat to Australia's expanding economy. Here's what you need to know.

Down Under dollars
Australia's economy isn't booming on the backs of kangaroos or koala bears. It's growing from down under -- literally. Australia's mining sector has been pouring money into the ground for the past decade, and it's paid well. Iron, coal, uranium, and natural gas production have all turned Oz into an impressively rich country.

Australia is one of just three OECD countries that is a net energy exporter, due primarily to coal and liquefied natural gas (LNG). The country claims the title of fourth-largest producer in the world for both coal and LNG.

Peabody Energy Corp

Source: Peabody Energy Corp.; Wambo Coal Mine


Peabody Energy Corp. (NYSE:BTU), the world's largest private coal company, is heavily invested in Australia's economy. In 2012, the company saw Australian sales volumes increasing an astonishing 30% to 33.0 million tons. Even with softer coal prices, Australian revenue accounted for 43% of the company's $8 billion in sales.

Not to be outdone, mega-miner Rio Tinto (NYSE:RIO) announced this month that it had broken its own records. Four of its Aussie coal mines achieved new annual production highs, and the company contributes a laundry list of commodities to Australia's economy: uranium, aluminum, copper, iron ore, gold, diamonds, and even salt.

Rio Tinto

Source: Rio Tinto PLC; Australia Operations .

But the mining boom may be about to go bust, according to Deloitte Access Economics' quarterly Business Outlook report. As mining investment eases off, Deloitte expects economic growth to slow as unemployment creeps higher.

"Recent years saw a deluge of development dollars go into the resources sector," the report notes, as reported recently by The Sydney Morning Herald.. "But those dollars have already peaked, and the key question is just how fast or slowly the bonanza of recent years unwinds."

Australia's Achilles' heel
Powerful dollars don't do much good in a weakening economy. Mining may have expanded Australia's economy, but it also gave it an Achilles' heel.

The rest of Australia's economy has been struggling to keep up with the mining sector's price push. Domestic costs for Australian producers have headed higher as its citizens' standard of living has soared. Aussies earn around $13,000 more than the average American, and nearly double that of their neighboring New Zealanders.

Australia GDP per Capita Chart

Australia GDP per Capita data by YCharts

For export-oriented companies, their pricier products have struggled to maintain global competitiveness. And locally, Australians are increasingly choosing cheaper import products over those produced in-country.

Australia's largest producer of premium fruit, SPC Ardmona, has seen sales plummet in the past few years. The 90-year-old company has watched from the sidelines over the last five years as its market share of private label canned fruit has been squeezed to 33% while exports have nosedived 90%.

"We are not competing on a level playing field against the overseas sourced private label products," said Managing Director Peter Kelly in a statement as he sought approval for a temporary subsidy. "We are competing against products from countries that have considerably lower labor and production costs and arguably lower quality standards than we have in Australia." This week, the Australian government turned down an A$25 million ($22 million) grant request to help the company retool its facilities.

The future of Australia's economy
Ironically, the slowdown of Australia's economy may be a blessing in disguise. Economic growth is oozing, its dollar is dropping in value, and Aussies will likely be in for a tougher time in the next few years. But the country needs to quit its mining addiction, and the sooner it pulls its head out of the ground, the better.

The U.S. Has What Australia Needs
Australia's economy is going through the same growing pains that America felt when China first snatched its manufacturing sector. But the U.S. is back.

The United States is now in a position to dominate the global manufacturing landscape thanks to a single, revolutionary technology: 3D printing. Although this sounds like something out of a science fiction novel, the success of 3D printing is already a foregone conclusion to many manufacturers around the world. The trick now is to identify the companies -- and thereby the stocks -- that will prevail in the battle for market share. To see the three companies that are currently positioned to do so, simply download our invaluable free report on the topic by clicking here now.

Justin Loiseau has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers