On the Upswing Down Under

Strong exports and a weak currency buoy the economy

Just 12 months ago, Australia was being written off as an economic backwater. Lacking a high-tech manufacturing sector, the country seemed out of sync at a time when many nations were benefiting from the info-tech boom. To make matters worse, a 10% goods-and-services tax imposed last year put a damper on growth; in the fourth quarter of 2000, the economy contracted 0.6%. Just months after hosting the glittering Olympic Games in Sydney, Australia seemed mired in a national funk.

That's when the much maligned Old Economy came to the rescue. As the rest of the world slowed to a crawl, Australia demonstrated its resilience. Such stodgy standbys as agriculture and natural resources provided an unexpected buffer against the global malaise. Thanks to an Aussie dollar that has fallen 12% against the greenback in the past year, plus robust prices for coal, dairy products, and wheat, farmers and mining companies are having a very profitable 2001. Their combined output for the first half accounted for more than two-thirds of Australia's merchandise exports, fueling the nation's first trade surplus since 1995.

STEADY DEMAND. To be sure, exports will suffer if the rest of the world does not recover soon. Already, the Australian dollar is rising against its American counterpart, and some commodity prices are softening amid slackening world demand. But domestic consumption, which accounts for 60% of gross domestic product, is strong, thanks in part to the fact that consumers escaped the stock market wealth destruction that occurred in more tech-oriented economies. At the same time, the housing market has staged a comeback. Goldman, Sachs & Co. economist Dominic Wilson has revised his 2001 GDP growth forecast for Australia to 2.6%, up from 2%. If Australia can keep growing for the next 6 to 12 months, it might sidestep the global downdraft. Then again, he says, "any open economy is going to find it can't insulate itself forever."

Strong world demand has been a boon for Aussie coal producers, which last year accounted for 10% of all exports. The value of coal shipments grew 28%, to $5.6 billion, for the year ended June 30, and demand for the coal used to fire power stations is expected to keep growing steadily at 3% to 5% a year. One major beneficiary is BHP Billiton Ltd. (BHP ), the country's largest mining concern. Gross profits from its Australian coking operations doubled last year, to $225 million.

But it is farming, the hoariest of the Old Economy sectors, that has truly flourished in the past 12 months. In the state of Victoria, where 65% of Australia's dairy products are produced, the farm-gate price of milk climbed 35%, to 14.5 cents a liter, thanks mainly to robust foreign demand for Australian cheese and yogurt. Business is so good that dairy farmer Anthony Rea has hired an extra hand and plans a vacation to the Grand Canyon, both unthinkable before milk prices surged. "You feel much happier when you wake up to milk the cows," he says. Wheat farmers also are benefiting from a weaker Aussie dollar, as are wine makers (page 54).

On the domestic front, a sharp upturn in the housing market is spearheading the urban recovery. Fueling the boom: a combination of mortgage rates as low as 6%, expansion of government grants for first-time homebuyers, and a general rise in confidence. After hitting a 40-year low at the end of 2000, the rate of new housing approvals has since jumped 40%.

Retailers are smiling, too. At a Bang & Olufsen (BGOUF ) outlet in Sydney, salesman Chris Parsons says "we died quite a bad death for a couple of months." Now, the Danish electronics maker is on a roll, moving such expensive toys as its $7,800 widescreen digital TV; overall sales are up 20% this year. BMW is also doing well. In the first half, sales were up 36% from the same period last year. Ironically, the new 10% sales levy is helping sell cars since it replaces a 22% tax on vehicles.

Despite all the good news, Australia isn't in the clear. The big question is whether domestic demand can sustain the economy until the world situation improves. In the leadup to yearend elections, the government aims to prime the pump by spending on road and rail improvements. Even if the global economy tanks in the second half, Australia will still experience higher growth, says Goldman's Wilson. After that, it's anyone's guess.

By Frederik Balfour in Sydney

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