Just because iron ore is sinking doesn't mean Australia's economy will follow

Bill Pugliano/Getty Images

If there’s one thing Australian markets types love to talk about at present, it’s the slumping iron ore price.

The price decline has got financial markets talking, with analysts seemingly trying to outdo each other by forecasting ever-lower prices.

It’s collapsing and some high-cost, high-profile miners are likely to follow suit. There’s a sense of doomsaying about this; it’s going down the gurgler, taking the industry and Australia with it.

There’s little doubt that the outlook for iron ore remains bleak, with a massive supply glut continuing to build as seaborne supply ramps up and global demand weakens, particularly from the world’s largest consumer, China. Many predict that it will take years for the market to find equilibrium, weighing on prices in the interim.

But it’s easy to overestimate the impact of the iron ore slump on Australia’s economy. While it is pressuring national incomes, that doesn’t automatically imply the nation’s economy is in trouble.

Take the chart below, showing the value of Australian services exports compared to the nation’s iron ore exports.

Clearly, services now dominate iron ore when it comes to export value.

In the 12 months to October 2015, services exports rose to $5.624 billion, the second highest level on record. That represents a 4.1% increase over the same month a year earlier, or some $221 million.

In cumulative terms, services exports over the past year totalled $63.856 billion, the highest level on record.

However, because services like tourism and education aren’t traded on an exchange, they get very little attention. There’s no day-to-day price volatility, hence the focus on these parts of the economy from markets, analysts and media is negligible.

In comparison to services, iron ore exports totalled just $51.057 billion over the past 12 months.

The value is still $41.138 billion more than a decade earlier. Even with a price drop of 80% in the spot price since early 2011, the annual value of Australia’s iron ore exports has risen by 414%.

Services exports are ramping up, buoyed by the falling Australian dollar and a rapidly growing middle class in Asia, while iron ore exports – despite the price slump and multitude of armageddon-like forecasts – are still up more than fourfold over the past decade.

Put simply, Australia is not just a giant iron ore pit, nor does the bear market in its price mean that the economy is in dire straits. The nation’s services sector is starting to hum, with employment soaring over the past 12 months.

Economic rebalancing has not only started, it’s accelerating.

There’s something to take into your next conversation with a bear.

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