Australia is in economic trouble as China’s property crisis impacts the country’s trading position.
A decline in iron ore prices since May has led to a deterioration in Australia’s current account balance, or what Australia owes financially to the rest of the world.
New balance of payments data showed Australia ran a current account deficit of $10.7 billion in the second quarter, its worst since mid-2018.
As recently as December, Australia had a current account surplus.
Until recently, rising prices for iron ore, the raw material used to make steel, meant that the rest of the world owed money to Australia based on the flow of goods, services and income.
From mid-2019 to the end of 2023, Australia ran a current account deficit for only two quarters, while China continued to consume large amounts of steel to build residential towers.
Australia enjoyed consecutive current account surpluses for the first time since the early 1970s, setting new records.
In September 2021, Australia had a current account surplus of $22.1 billion, despite China’s sanctions on Australian coal. The communist country is still dependent on Australian iron ore and has little choice.
Australia is in deep economic trouble as China’s property crisis hits the country’s trading position (pictured are unfinished apartment towers in Hebei province)
But the demise of Chinese developer Evergrande earlier this year sparked an economic downturn in the property market of Australia’s largest trading partner.
Australia is now running current account deficits rather than surpluses as the gap between the value of exports and imports narrows.
Belinda Allen, senior economist at the Commonwealth Bank, said falling demand for Australian commodities had widened Australia’s current account deficit.
“Lower commodity prices for iron ore and coal are the main drivers of this deterioration,” she said.
Iron ore prices have fallen to $98.70 per tonne from $119 in May, based on cost and freight rates quoted by financial markets.
The Ministry of Finance is concerned and predicts that government revenues will fall dramatically early next year. This will depress government revenues and lead to larger budget deficits.
The budget forecast that iron ore prices would almost halve to just $60 a tonne by the third quarter of 2025, based on the value before transport costs are taken into account.
A drop in iron ore prices since May has eroded Australia’s current account balance, or what Australia owes to the rest of the world (pictured is a Rio Tinto mine in Western Australia)
Every $US10 per tonne drop in the iron ore price equates to a loss of $500 million in potential government revenue. Furthermore, the value of this important commodity has fallen by 38 percent since the start of 2024.
Anthony Albanese is the first Labour prime minister since 1989 to achieve two consecutive budget surpluses.
But the $9.3 billion surplus for 2023-24 was based on high iron ore prices, which boosted corporate tax revenues.
A budget deficit of $28.3 billion was forecast for 2024-25, rising to $42.8 billion in 2025-26.
Economists expect the national accounts for the June quarter, to be published on Wednesday, to show annual economic growth of just 0.9 percent.
This would be the weakest gross domestic product growth since the 1991 recession, aside from the 2020 pandemic.
Adam Boyton, head of Australian economics at ANZ, said the stage three tax cuts and $300 electricity rebates were unlikely to deter households from cutting spending to weather the steepest interest rate rises in a generation.