Australia's Mining Boom State Has Slipped Into Recession - And Analysts Are Sounding Really Worried

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The state that led Australia’s spectacular mining boom has slipped into recession — the latest in the increasingly grim run of data on the state of Australia’s economy.

Some economists are starting to use the R-word about the whole economy.

Analysts had some dour observations after national accounts showed the mineral-rich state of Western Australia recorded its second consecutive quarter of negative growth, dragging on the national economy which shows increasing signs that the peak of the mining boom has passed and other sectors aren’t growing fast enough to pick up the slack.

Domestic spending contracted for the second consecutive quarter too – leaving Australia in a domestic spending recession.

UBS chief economist Scott Haslem is quoted in The Australian today as characterising the domestic economy as “near recession”.

Many now expect the Reserve Bank of Australia to make another cut to interest rates sooner than previously expected to stimulate demand. Goldman Sachs, which correctly called the surprise cut in May, now expects the RBA to cut rates in July – and again in November, which would take Australian interest rates to a record-low 2.25%.

Previous forecasts had been for one rate cut in the back half of the calendar year, but the economy is increasingly in need of a more urgent kick.

AMP Capital chief economist and head of investment strategy Shane Oliver said in a note that beneath the headline figures of 0.6% economic growth for the quarter, and 2.5% for the year, there were more troubling signals:

What’s more if you scratch below the surface the economy is actually quite weak. Thanks largely to a sharp fall in capital goods imports the trade sector contributed a very strong 1 percentage point to growth in the March quarter. In other words, were it not for this growth would have actually been negative. In fact, domestic spending fell for the second quarter in a row leaving Australia in a domestic spending recession.

The recent rise in iron ore prices and the falling value of the Australian dollar helped but Tim Toohey at Goldman Sachs was unconvinced it would be a long-term trend.

Falling labour costs and a 4.0% qoq rise in corporate profits gave a small boost to profit margins in the quarter, however, the vast majority of this rise in profits is attributable to the mining sector in general and iron ore prices in particular. Given the more recent decline in the iron ore price and our $80/tonne price target for iron ore by 2015 we see the rise in profits as more of a temporary aberration rather than a start of a strong cyclical uptrend.

Toohey also said it was “somewhat worrying” that domestic spending contracted despite “being aided by favourable weather patterns, government stimulus, near-term proximity to interest rate cuts, and solid wealth gains.”

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