Suburb With 27% Jobless Shows Danger of Australian Recession

In a shopping center full of sale signs in Broadmeadows, a Melbourne suburb with 27 percent unemployment, Soney Kul is struggling to shift half-price jewelry.

“People don’t want to spend,” the 27-year-old said, gesturing at the sparsely-filled display cases in his family-owned store, Altinbas. “They’re too scared to spend because they don’t know what the next day will hold.”

After a decade-long mining boom powered by Chinese demand, Australia’s economy is falling back to earth fast. Among the worst hit are industrial areas like Broadmeadows, whose Ford Motor Co. plant will shut after a record-high currency made operations untenable, and the slowdown is spreading. Only four months after economists were forecasting interest-rate increases in 2015, the country’s central bank has cut its benchmark to a fresh record low.

Goldman Sachs Group Inc. estimates a one-in-three chance Australia will fall into recession in the next 12 months while a Bloomberg survey of economists shows the probability of a contraction has risen in recent months. Australians’ wage growth last quarter matched a record-low pace and prices of the country’s key commodity exports were down 27 percent in February from a year earlier.

“You’re at stall speed,” Tim Toohey, chief economist for Goldman Sachs in Australia, said of national income growth. “It’s that level of uncertainty, and excess capacity in the labor market, that is continuing to be the main story on why consumers aren’t engaging.”

Rate Cuts

Australia’s jobless rate stands at a 12 1/2-year high of 6.4 percent and there are a growing number of pockets in the nation where it’s much worse. Suburbs like Broadmeadows and Elizabeth in South Australia are dominated by manufacturers that received little benefit from China’s surging demand for raw materials, while suffering the fallout from an overvalued currency driven up by the commodities boom.

Across Australia, regions with unemployment of 10 percent or more of the workforce rose to 13.3 percent of all areas in the third quarter from 10.9 percent of the total a year earlier, according to government data released in December.

In response, the central bank cut its benchmark interest rate last month for the first time in more than a year, saying growth would stay “below trend” and unemployment peak at a higher level for longer than it previously expected. Traders are pricing in almost two more reductions over the next 12 months from the current record low of 2.25 percent.

Recession Risk

Businesses drew little comfort from the lower rates with National Australia Bank Ltd.’s index of confidence falling to about zero in February from 3 points in January, its lowest level since before the Liberal-National coalition government was elected in 2013, according to the bank.

“Unfortunately, we don’t have a confidence lever, we do what we can by having interest rates low,” Reserve Bank of Australia Assistant Governor Christopher Kent said in Hobart Wednesday. “The Australian economy has good prospects for growth over the longer term.”

Combined sales at the Broadmeadows shopping center were down 13 percent in the 12 months through June compared with three years earlier, according to calculations based on presentations by the mall’s owner, Novion Property Group.

While most economists see only an outside chance of a recession in Australia, the probability of a contraction has risen to 18 percent in February from 11 percent in August, according to a Bloomberg survey of 11 analysts.

Iron Ore

Households and businesses aren’t spending as their earnings are barely growing. Real net national disposable income for each Australian hasn’t been above a peak set in the third quarter of 2011 at any time since then -- the longest such stretch in 21 years.

Australia’s terms of trade -- its export prices relative to import prices -- also peaked in 2011 as Chinese demand surged for iron ore, the country’s most valuable export. Since then, growth in that demand has softened, sending the price of ore with 62 percent content delivered to Qingdao to a record low of $58.58 from a peak of $191.70 in 2011, according to Metal Bulletin Ltd.

Consumer confidence, which fell 1.2 percent in March from a month earlier, has been in pessimistic territory for 12 of the past 13 months, according to an index compiled by Westpac Banking Corp. Households are now paying down their credit cards at a record rate.

“Over recent years many more households have focused on paying down their debts, rather than borrowing more, and the saving rate has increased,” RBA Deputy Governor Philip Lowe said in a speech in Sydney March 5. In the decade to the mid 2000s “the level of interest rates that we have today would have caused a large boom in borrowing, but this has not occurred.”

Crime Rate

The difficulties in Broadmeadows are reflected in a higher crime rate. The suburb ranked among the worst in Victoria state for burglaries in 2014, averaging one in 32 homes, according to an analysis conducted by the Royal Automobile Club of Victoria.

In the South Australian suburb of Elizabeth, site of General Motors Co.’s Holden unit that is due to close in 2017, unemployment has climbed to 33.3 percent. There too, crime rates are the third-highest in the greater Adelaide metropolitan area.

The impact of job cuts on confidence and spending are compounded by government efforts to rein in a ballooning budget deficit, which if left unchanged would see debt equal 60 percent of gross domestic product by 2055 from 15 percent currently, according to a long-range government report released last week.

Labor Costs

The outlook isn’t all doom and gloom. A 30 percent decline in Australia’s currency since it peaked above $1.10 in 2011, and smaller wage gains are helping to better position domestic producers against imported goods. The local dollar traded at 76.40 U.S. cents at 10:54 a.m. in Sydney.

Australian labor costs, which were higher than any Group of Seven economy when Ford announced the planned closing of its Broadmeadows plant in 2013, are now lower than in every G-7 country bar Japan, Canada and France, according to data from the Organization for Economic Cooperation and Development.

“In our liaison program a number of businesses have reported that they see the lower exchange rate as opening up new opportunities,” RBA’s Lowe said. “In time, we should see the effect of this on domestic production and spending.”

Early Transition

Broadmeadows could also be seeing an early transition from old manufacturing to newer products as CSL Ltd., the world’s largest maker of blood plasma-derived therapies, expands a manufacturing plant in the area. It will employ 200 people during the construction phase and a further 190 high-skilled workers once it’s up and running.

Back at the Broadmeadows shopping center, women’s retailer Envy You was holding an end-of-lease sale and Pumpkin Patch a final clearance. About a third of jeweler Kul’s neighbors in the center had sale signs in their windows during a visit on March 1, not traditionally a discounting season in Australia.

“Every day is a challenge,” said Kul, who estimates the typical purchase in his store is down by about a half from a previous average of A$400 as traffic through the shopping center slows down and impulse purchases fall. “Consumer confidence is the biggest issue.”

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