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Dodging the bullets of recession

IF you need more persuading that the world’s industrial countries are headed for a synchronised recession, check out the commodities markets. Prices for copper and zinc are at their worst levels since 1985, and both nickel and aluminium have fallen towards their Asian financial crisis lows.

Oil has been seeping steadily towards a two-year low of $US20 a barrel. The gold price, which bounced to $US294 an ounce immediately after the attack on the World Trade Center, has come screaming back to $US280.

Even before the outbreak of terrorism, prices were wilting on the London Metals Exchange as red lights began flashing for global growth. US industrial production has fallen for 13 consecutive months, the longest continuous decline since Word War II. Manufacturing output in America is 4.8 per cent down in a year, Japan is almost twice as bad with an 8.7 per cent slump, and the rest of Asia, with the possible exception of China, is in the mire. Consumer confidence is falling almost everywhere, and there is more than a whiff of deflation.

All of this is bleak tidings for Australia, which earns 55 per cent of its export earnings from industrial minerals.

Most miners are facing falling orders, compounded by weak prices, while they wait for a turnaround in global growth. The only medium-term relief would come from a cut in the production of minerals by some overseas competitors. Further out, the work needed before the Beijing Olympics in 2008 will boost demand for copper among other metals that will be used in new telecommunications networks and infrastructure projects.

It was not supposed to be this way. Mining exports jumped 24 per cent to a record $A55 billion in the year ended June 30. Assisted by a cheap Australian dollar trading at only $US0.51 cents, buoyancy was confidently expected to last until at least 2002-2003 – provided demand did not fall off a cliff. The problem is that it did.

The rapid decline in the price of oil presents something of a puzzle. Stumbling economies and rising inventories are responsible for the retreat from $36 a barrel, which brought soaring petrol prices, badly hurting consumers. Now, sentiment suggests the price will dip under $20.That surely will not happen, if there are disruptions of supply. There is a possibility that Iraq’s exports of 2.2 million barrels a day could be blocked. Baghdad and the United Nations are still quarrelling over the extensions of the oil-for-food agreement.

A scarier spectre is a stepping up of the US hunt for terrorists leading to an attack on Iraq, spreading the war through the Middle East, and potentially destabilising Saudi Arabia. That scenario might result in oil jumping through $40 a barrel and would bring inflation back on the radar.

Can the Australian domestic economy dodge all these bullets? Standard and Poor’s believe we have a fighting chance. The powerful rating agency, which does not hesitate to sledge corporations and countries it considers are swinging the lead, has praised Australia for its “combination of good macro-economic and policy settings”.

S&P says economies such as Japan, Taiwan and Singapore are already in recession, with South Korea and Hong Kong facing sharp slumps in the December quarter, and possibly through March 2002. It says the Asian comeback will be muted “as much because of domestic problems as the expected weakness of the US recovery”. By contrast, the agency says Australia’s economy has been forced out of step with the US by the effects of the Olympics and the GST boom-bust.

S&P Asian chief Richard Martin says: “critically, this will enable Australia to bridge the December quarter chasm when the economies of the US and Asia will contract sharply.”

Martin believes Australian banks are “a stand-out in terms of asset quality and earnings.” He says “while not immune to the global slowdown, and some deterioration in credit quality, they are expected to outperform regional peers.”

An analyst was grumbling to me the other day that the big Australian bank shares are more expensive than their US counterparts. That might be because they have not lent truckloads of money to Argentina – and all those new technology entrepreneurs in short trousers.

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