>Is Australia following the US into a Recession

A recent article talked about the plight of some Australian business’ (particularly in the mining sector) due to the global economic contraction resulting from the US recession and a slowdown in Chinese commodity demand. The fear was that the economic weakness, which is currently contained to a few sectors, is rapidly spreading across the rest of the Australian economy and could drive the nation into a recession (negative growth). Here are some worrying signs ahead:

In a matter of weeks, Australia’s [commodities] boom has gone bust. Now economists at Citigroup and JPMorgan Chase, among others, are forecasting that Australia’s economy will shrink this quarter and next, tipping the land down under into a recession for the first time since 1991. JPMorgan sees the jobless rate — a record low 4% just 10 months ago — rising to 9% by 2010.

The financial crisis is hitting debt-laden Australians hard. “We’re headed for a recession for the same reason the USA is in one now — the bursting of a debt-financed speculative bubble,” says economist Steve Keen of the University of Western Sydney, one of the first forecasters to sound the alarm. Keen says Australian households have been adding debt — as a percentage of economic output — even faster than their U.S. counterparts over the past 18 years. Now they’re feeling pinched and are cutting back. “We have a home-grown recession coming our way, regardless of what happens in the rest of the world,” Keen says.

Keen predicts the downturn will unfold a bit differently than it did in the USA, where problems began in the housing market and spread to the broader economy. “We’re likely to go into the macro crisis first as debt growth plummets; then a housing crisis as the newly unemployed are unable to maintain their mortgages; and finally a credit crunch where the banks’ solvency doesn’t look so hot anymore.”

China, Australia’s No. 1 trading partner, isn’t providing as much shelter as expected from the global economic tempest. China itself has proved unexpectedly vulnerable to slowdowns in the United States and Europe. Its economic growth is decelerating rapidly from the double-digit annual pace of the past decade. Last month, Chinese exports fell for the first time in seven years. “China’s economy has slowed much more quickly than anyone had forecast,” says Glenn Stevens, governor of Australia’s central bank. Add in China’s plummeting stock market and crumbling housing prices, and “There goes Australia’s China blanket,” economist Keen says.

The Australian reserve bank and government have responded aggressively to the economic threat by chopping interest rates and spending more than $10 billion to jump-start the economy. However will this be enough? I think Australia has a more solid economy and financial framework than other countries, but because of its small financial size and dependence on America, China and Japan it cannot escape a deep global recession. So buckle down in 2009, make sure you have an emergency fund and above all be prepared for a rough year ahead.