Commodities-Rich Australia Leads the West's Recovery

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The Reserve Bank of Australia (RBA) last month became the first Western economy to raise its key interest rate since the financial crisis began almost two years ago. It proceeded to raise the rate for a second time in a month last week, just before it published its quarterly report on Friday, which says bottlenecks obstructing exports of its vast resources such as iron ore and coal are about to be relieved.

“Over the next two years, if capacity comes on line as planned, production of these bulk commodities could increase by around one third, with further significant increases possible over the remainder of the decade,” the RBA said

As a result of this expected boom in the commodities sector, the RBA raised its forecast for growth of Australia’s economy from 0.5% to 1.75%, and boosted its 2010 estimate a full percentage point to 3.25%.

“The RBA here is foreshadowing years of expansion based on resources, population and Asian demand,” Su-Lin Ong, a senior economist with RBC Capital Markets Corp. told Reuters. “It’s big picture positive for Australia and the Australian dollar, and means rates are going nowhere but up.”

At the forefront of the Australian economic boom will be the nation’s huge natural gas reserves, particularly the Gorgon gas field, first discovered in 1981. Developers Chevron Australia, Shell Development Australia and Mobil Australia Resources in September got their first approval to begin work on the field, which has more than 40 trillion cubic feet of gas.

The Gorgon field, Australia’s largest natural resource, is responsible for the nation’s largest trade deal ever with the world’s fastest-growing economy: China. Inked last summer, the deal calls for PetroChina Co. Ltd. (NYSE: PTR) – Asia’s largest oil and gas company – to buy 2.25 million tons per year of liquefied natural gas (LNG) from Gorgon over a period of 20 years.

The Gorgon Project is globally and nationally significant with a resource base of more than 40 trillion cubic feet of gas and an estimated economic life of at least 40 years from the time of start-up,” said Chevron Australia Managing Director, Roy Krzywosinski.

“Furthermore, the Gorgon Project is Australia’s largest single resource project and is set to deliver significant economic benefits and create around 10,000 indirect and direct jobs during peak construction.”

While Australia patiently waits for the first Gorgon LNG to ship in 2014, it expects LNG from the $12 billion Pluto project in early 2011, just six years after the field was discovered. Combined with the larger Gorgon project, the RBA says LNG exports could grow three to four times, rivaling its mineral exports.

“Production increases of this magnitude would likely see the value of LNG exports increase towards a similar share of total exports as for coal or iron ore,” the RBA said.

Encouraging as this growth may be to Aussies, it won’t come without some growing pains.

Australia faces an “extended period of prosperity in the years ahead,” meaning a strain will be put on the country’s housing and labor markets, RBA Deputy Governor Ric Battelino said at a conference last week.

Australia’s population is growing more than 2% per year, with two-thirds of the growth coming from immigration in the past year.

Workers are likely to be in short supply, leading to strong demand for skilled migrants and therefore fast population growth,” Battellino said. “This, in turn, will have flow-on effects for housing markets.”

That bodes well for home prices in Australia, which gained 3.7% in the third quarter and are up 6.5% on the year, according to market research firm Australian Property Monitors. But that’s not going to help a buyer if there aren’t enough homes on the market.

“We’ve got to get ahead of the curve,” Australian Treasurer Wayne Swan said in October at a press conference. “We’ve not been building enough houses and we have strong population growth so it will be very important as we move through to economic recovery to ensure we don’t have capacity constraints that flow from the shortage of housing.”

Australia is Leading the West’s Recovery

Looking at interest rate increases in Australia could serve as a sign of things to come in other Western nations, most of which have kept their key lending rates at record lows.

Inflation in Australia may be a leading indicator of inflation in the United States, but until the United States or the European Union begins to raise their interest rates, “we'll carry on in the current modest recovery with commodities bubble,” said Money Morning Contributing Editor Martin Hutchinson, an investment banker with more than 25 years’ experience.

Still, unusually low interest rates worldwide should give way to rising prices, and Hutchinson says to “watch for U.S. inflation to start ticking up soon.”

The U.S. Federal Reserve should begin to raise its key interest rates sometime next year, but has yet to give any specifics, stating last week that current economic conditions are “likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Meanwhile, the United Kingdom also kept interest rates low as it continues to inject money into its system, announcing Thursday that it will spend another $41 billion (25 billion pounds) on stimulus measures.

Australia’s 5.7% unemployment rate looks tame next to the United States’ 10.2% and the United Kingdom’s 7.9%. Even commodities-rich Canada saw its rate swing back up again to 8.6% in October.

In the United States, programs like the Car Allowance Rebate System, better known as “Cash for Clunkers,” helped prop its economy up 3.5% in the third quarter, while the United Kingdom’s gross domestic product (GDP) disappointed, falling 0.4% as consumers put more of their earnings toward paying off debt.

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