Australia is the nation most exposed to the declining commodity prices, according to financial research analysts AllianceBernstein.
“The growth dynamic in China is clearly changing … as China continues to rebalance away from being so investment led,” Guy Bruten, senior economist of the Asia Pacific region at AllianceBernstein said.
AllianceBernstein see this tapering off of Chinese demand, coupled with the end of mining investment, as causing a commodity downturn.
They pointed out that Australia is also in for a larger shock than such exporting nations as Norway, Chile and New Zealand in adjusting to this landscape.
“Australia is the country likely to be affected most by a commodity downturn, and Norway as the commodity exporter [is] likely to be least affected” Mr Bruten warned.
More specifically, Australia has “the biggest exposure to the shock, the biggest exchange rate appreciation [and] close to the biggest investment boom”, he said.
This is likely to spill over into declining government revenue and asset prices as the boom loses its momentum.
“As commodities begin to decline there is more of a squeeze on real households’ incomes, so the consumption picture does not look so good,” Mr Bruten said.
This is likely “to spill over into assets” and there is unlikely to be the “growth in property wealth” that has been seen in the past. In turn, this will also have an effect on government revenues.
Mr Bruten predicted this will cause unemployment to rise to near seven per cent over the next 18 months.
“Even though you might generate successfully three per cent GDP over the next few years, that might be associated with relatively high unemployment growth and good productivity,” Mr Bruten stated.
The only light at the end of the tunnel is if there is a surprise in India, or if the non-mining sector is able to pick up some of the slack from the mining sector.
This leaves Australia in a much more difficult policy environment than it has been in the past.
“There a whole range of things that need to be addressed in a much more difficult environment than we have been used to in the past 10 to 15 years” Mr Bruten concluded.
