Browsing recent headlines emblazoned across the business pages of Australia’s newspapers would leave the distinct impression that the run of good fortune in the Lucky Country is set to come to a shuddering halt.

“Goldman Sachs: The worst is yet to come,” trumpeted The Sydney Morning Herald, as the newspaper telegraphed the investment bank’s concerns about the “income shock” Australia faces as a result of the decline in commodity prices. Prices for iron ore, Australia’s largest export, have plunged around 40% this year to a five-year low, while coal prices have dropped 15% compared to a year ago. Much of the slump has been fueled by concerns about China’s demand for commodities as its government attempts to rebalance growth in the world’s second largest economy.

Australia’s track record of growth is the envy of policymakers around the world, notching up 23 consecutive years of growth. The global financial crisis was shrugged off thanks to a combination of low interest rates, government spending, and most importantly, exposure to China’s debt-fueled and resource-intensive building binge. While no-one is predicting a recession in Australia, more sober times are coming. The days of the cashed-up bogan enriched by the mining boom are over.

Weak prices for Australia’s major exports and the waning of the investment boom in major resource projects gives policymakers plenty to worry about. The narrative of Australia’s economic growth over the past decade has been shaped around the idea of a two-speed economy. In the halcyon days of the resources boom it was the mining states of Western Australia and Queensland that outpaced those states with less bountiful geological endowments. The tables have now reversed. Bean-counters in Canberra, Australia’s capital city, haven’t smothered themselves in glory with an iron ore forecast of about US$95 a ton contained in May’s federal budget. Iron ore currently trades around US$80 a ton.There is no doubt an income shock is coming. The Reserve Bank of Australia recently lowered its growth estimates by a quarter of a percentage point and expects the economy to grow between 2% and 3% by June next year.

There are clearly good reasons to be downbeat on the trajectory for Australia’s growth. But opposing opinions make for a good market, and there are some analysts who argue that the outlook is not as dire as promoted by more bearish investors. “The basic argument is that Australia’s mining boom is fading rapidly and there is a lot of uncertainty about what will drive the economy,” says Shane Oliver, AMP Capital’s chief economist.

One pillar of support for the Australian economy is the expectation for interest rates to remain low. The waning of activity in the once-red hot resources sector will dampen inflationary pressures, providing the Reserve Bank of Australia with the flexibility to keep interest rates low. Bond futures suggest interest rates are likely to be kept at a record low of 2.5% at least until the middle of next year. The RBA hopes lower rates will allow the non-mining part of the economy to shoulder the yoke of growth as resource industry activity cools. There is no doubt the hammering of commodity prices will complicate the transition.

The RBA, unlike many major central banks, has plenty of monetary policy ammunition should growth slow faster than expected. However, the central bank’s willingness to pull on the monetary policy levers may be complicated by housing bubble concerns in major markets like Sydney. But Bruce Rolph, Citi’s head of Australian equities research, doesn’t see a housing bubble, pointing out Australia’s real estate sector is mainly driven by domestic demand, which will be buoyed by low interest rates.

Australia’s four big banks – Commonwealth Bank of Australia ( CBA.AU ), Australia and New Zealand Banking Group ( ANZ.AU ), National Australia Bank ( NAB.AU ) and Westpac ( WBC.AU ) – also stand to benefit, as the low interest rate environment drives borrowing activity. While Australia’s major banks have proved resilient to the global economic turmoil, their hold over more than 80% of the home loan market bears watching should unemployment start ticking higher. “The banks are still doing well and the high yields offered on their stocks make them attractive to investors,” said AMP Capital’s Oliver. Australia’s big four banks offer a dividend yield of around 6% on average.

Retail stocks have taken a beating as the clouds gathered above the Australian economy. Department store operator Myer Holdings ( MYR.AU ) is down 30% so far this year, while electronics retailer JB Hi-Fi ( JBH.AU ) has fallen 25%. However, both Oliver and Citi’s Rolph see decent upside in the retail sector. In addition to low interest rates continuing to fan household consumption, there could be another less obvious driver – a depreciating Australian dollar.

Analysts expect the Aussie dollar to drop to USD0.85 by June next year, while Oliver sees the exchange rate possibly dipping below USD0.80. Although that will make imports more expensive for Australians, retailers may actually see sales go up. “When the Australian dollar is high, Australians tend to travel overseas and do their shopping there, as well shop online on international sites,” said AMP Capital’s Oliver. “But as the currency depreciates, people will return to brick-and-mortar stores.”

In the long term, the slowdown in Australia’s mining sector could also benefit the overall health of the country’s economy. “The country is getting back a more balanced economy, as growth picks up in New South Wales and Victoria and slows in Western Australia,” says Oliver.

The Lucky Country may be set for tougher times, but it could be the long overdue prescription for rebalancing an economy built on the expectation that commodity prices would remain stronger for longer. They clearly haven’t.

Barron´s

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