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Overview of countries effected by credit, liquidity and inflation; recession conditions – Japan, Spain, Iceland, Australia – (update 9). Australian GDP points to overall economic weakness.

Posted by Adrian on September 3, 2008

As discussed in Overview of countries effected by credit, liquidity and inflation; recession conditions – Japan, Spain, Iceland, Australia – (update 8). Australia is showing a dramatic stagflation outlook. Australia’s GDP came in weak, at 0.3%. Which is due solely to the mining sector keeping the Australian GDP alive, with other aspects of GDP – particularly the banking sector, private investments that are non resource based in the negative. Also to keep in mind that the service industry, which makes up the bulk of the Australian economy is most likely already in a recession.

It would be a terrible and misleading bet to make (for the Australian consumer) that a mining sector will keep Australia out of a recession – when most of the country is essentially already in one and Australian banks (that are fragile) could become liquidity traps. So what might occur is the Australian government may send out ‘stimulus’ cheques akin to the US; drawn form the massive government pool of earning’s (tax) from the mining boom.

below is graph of Australian GDP, showing recent fall to 0.3%:

The recent rate cut of 0.25% from 7.25% (Australia cash rate), which was anticipated by the market for the last month or so (prior to cut), has absolutely crunched the Australian currency; dropping from (AUD/USD) 0.98 on the 15th July 2008 now at 0.83-0.82 (2 September 2008) – and the AUD has further to fall (on the back of USD strength, unwinding trading positions and the possibility of more rate cuts). So, I honesty can not see any offsets from a booming mining sector that could have already peaked for the Australian economy. If the Reserve Bank of Australia starts a rate cutting cycle, this will only compound inflation and erode the power of the AUD.

It will be interesting to watch the AUD and the Australian stock market in the coming months, to see if any rebound or bottom is to be called. I see the AUD falling further and All Ords still falling on the back of a weak economy and banking sector.

(click on graph for larger pic. AUD/USD)

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