Unlucky country

ROSS GARNAUT, one of Australia’s most eminent economists, describes the country’s current slump as its “economic dog days”. These are, he says, only set to get stickier, for they concern China—Australia’s biggest trading partner—and iron ore, the country's biggest export product.

Chinese demand for steel soared over the past decade as the country’s economy boomed. That sent prices sky-high for iron ore, the raw material from which steel is made; sustained demand helped keep Australia prosperous. Now China’s economic slowdown and the accompanying plunge in iron-ore prices has put the Australian economy in the doldrums. It is bad news for Joe Hockey, Australia’s treasurer, as he prepares to deliver the government’s second budget, on May 12th.

The warnings arrived in quick succession. A report this week by the World Bank said that the impact of China’s slowdown on the Asia-Pacific region would be “relatively larger” for commodity exporters such as Australia and New Zealand, whose economies are major links in the region’s supply chains. It expects neighbouring Pacific Island countries to suffer a knock-on effect from flagging trade, investment and aid.

Mr Hockey offered his own unhappy forecast. In an interview with the Australian Financial Review, a newspaper, he projected an iron-ore price of just $35 a tonne for the upcoming fiscal year’s budget-revenue calculations. That is little more than a quarter of its price in September 2013, when Prime Minister Tony Abbott’s conservative coalition-government came to power. In a speech to business leaders in Sydney on April 15th, Mr Abbott revealed that the impact on state coffers had been dramatic: in the year since its first budget, collapsing iron-ore prices have cut a projected A$30 billion ($23 billion) from revenue over the next four years. The price fell to $95 a tonne when the government passed its first budget, last May, and has halved since then. Mr Hockey says there now “seems to be no floor”.

His dire prediction is worse than most analysts had forecast. In fact the government's gloomy outlook seems designed to prepare Australians for a grim budget announcement, and an indefinite postponement of its promise to produce an early budget surplus in Mr Abbott’s first term. In December the treasury revised the current fiscal year’s deficit up to A$40 billion, from an original A$30 billion last May. Australia’s mining boom has helped its economy to notch up 23 years of continuous growth. But a fall in investment in the industry contributed to dampen growth to just 0.5% in the last quarter of 2014. Glenn Stevens, the central bank's governor, says such growth is "below-trend", and domestic demand "quite weak".

Still, Mr Garnaut predicts that falling demand for iron ore will not stop a wave of new supply from some of the world’s biggest miners—among them, BHP Billiton and Rio Tinto, two Anglo-Australian giants. With relatively low production costs, these firms can afford to keep shipping iron ore in spite of the sliding prices that threaten the profitability and survival of smaller miners, whose production costs are higher. Brian Gilbertson, a former chief executive at BHP Billiton, says that the big miners are further depressing prices: he calls it a “last-man-standing approach, where they remain committed to expanding and driving others out of the market”. But Mr Garnaut reckons this continued growth in output—an early estimate by a big domestic bank puts current shiploads at "an all-time high"—is keeping Australia out of recession. How long the country can stave off a protracted downturn will be the focus of Mr Hockey’s attention for some time to come.