Once again, Australia is about to be saved from global recession

Australia looks set to be saved – once again – from the jaws of a financial crisis and it’s thanks to one particular thing.

It was once said that, “it’s better to be lucky than to be good”.

In a lot of ways, the Australian economy has come to encompass these words over the past few decades.

Leaders of both stripes have consistently seen windfalls drop out of the sky to support the budget and the nation’s economy, contributing heavily to the near record period without a recession between 1991 and 2020.

In 2008, just as the rest of the world was staring down the global financial crisis and grappling with things like historic housing crashes, through the intervention of lady luck and Chinese stimulus, Australia managed to escape relatively unscathed, despite arguably having the same risks baked into its economy.

Then again in 2020 and 2021, Beijing once again inadvertently came to Australia’s aid, as much as it may not have wanted to this time.

Between May 2020 and April 2021, the price of iron ore rose by 177 per cent, providing the federal Treasury with a huge windfall just at the time it really needed it.

A uniquely Australian silver lining

Perhaps more than any other nation in the world, Australia has seen the silver lining from the storm clouds of the ongoing war in Ukraine. While oil producing nations saw a strong surge in oil prices following Russia’s invasion, prices have since fallen below where they were prior to when the war began.

On the other hand, Australian thermal coal prices are still 177 per cent higher than where they were before the war began. But more than that, the entire long-term outlook for Aussie thermal coal has been transformed.

The coal futures market prices coal for delivery all the way out to December 2027. Even more than five years from now, current market pricing has coal prices sitting 94 per cent higher than pre-war levels.

On a 12-month rolling basis, the value of Australian coal exports recently exceeded the value of iron ore exports, a herculean achievement given that iron ore export in value terms remain at more than double the level of where they were back in 2019.

🇦🇺#1 export commodity: coal

(ABS)#ausbizpic.twitter.com/62wGGYJr6r

— Pete Wargent (@PeteWargent) October 6, 2022

While liquefied natural gas (LNG) prices have come down in recent weeks due to more temperate weather and increasingly full gas storage in Europe, the longer-term demand for Australian energy exports once again remains.

Tangible benefits

In Australia during June, the nation recorded its largest trade surplus in history, exporting over $17 billion more goods and services than it imported for the month in net terms.

A trade surplus is when a nation exports a greater value of goods and services in net terms after subtracting the value of goods and services that are imported.

With trade surplus nations having more cash coming in to buy goods than local currency is leaving to buy imports, generally a trade surplus is a positive factor in the strength of a nation’s currency.

A good example of this is comparing the strength of the Australian (blue line below) and New Zealand dollars (orange line). While there are naturally other factors also at work, it serves to illustrate how a trade surplus and the stronger economic prospects that come with it can help boost a nation’s currency.

Currently the New Zealand dollar is languishing at near its early 2020 Covid crash lows, while the Australian dollar is still far above the 55 US cents ($A2.41) level recorded at that time.

While the weaker Australian dollar will add somewhat to inflationary pressures households and the economy are experiencing, the greater relative strength of the Aussie dollar compared with many other developed nations is currently insulating our little corner of the world from the worst of it.

The skies darken but there is another silver lining for the Lucky Country

As warnings surrounding the possibility of a global recession grow louder on the horizon, Australia has once again been provided with an unexpected windfall, this time in the form of further European Union sanctions on Russia.

Last week, the EU Commission announced that it would be prohibiting the purchase or import of iron and steel products from Russia, including those made in third party nations with Russian steel or iron ore.

With Russia – the fifth largest producer of iron ore in the world and the fifth largest producer of steel – the sanctions which are set to be phased in over the coming months and into 2023, could potentially place significant upward pressure on iron ore prices if rigorously enforced.

As companies throughout Europe and the world attempt to comply with the sanctions, Australian iron ore may become even more attractive.

Aussie iron ore could be about to get even more in demand. Photographer: Ian Waldie/Bloomberg via Getty Images

But wait, there could be more …

According to reports from sources within the White House, the Biden administration is weighing up potential sanctions on Russian aluminium exports.

For the calendar year 2021, Australia was the largest exporter of aluminium ores and concentrates in the world, exporting more than 35 million tons, 44 per cent more than second place Indonesia.

While far from Australia’s largest mining export sector, every little bit of extra revenue and economic activity will no doubt be welcomed by the Albanese government, given the challenging global economic backdrop.

Going forward

Over the past 30 years, every time Australia found itself in real economic trouble, lady luck has come to the nation’s aid. In this, 2022 has been no different. The changing global geopolitical landscape is currently offering the federal Treasury and the economy a bounty driven by high commodity prices.

As the sanctions on Russia continue to evolve and potentially tighten further, Australia may see more dividends driven by little more than the game once again changing in our favour.

Looking at Australia’s prospects as a supplier of the minerals required for the global green revolution and some of the lowest cost iron ore exports on the face of the Earth, the long-term future is arguably quite bright.

But in the medium term if the Lucky Country’s good fortune doesn’t hold up, there may be a significantly more challenging period in the interim.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator

Originally published as Once again, Australia is about to be saved from global recession