Australia's Economy Faces First Recession Since 1990 (Update1)

Nov. 11 (Bloomberg) -- Australia's economy, which cruised through the 1997 Asian financial crisis and the dot-com bust, is facing the prospect of its first recession in almost two decades.

Waning global demand for commodities threatens to staunch a five-year flood of export earnings that helped boost Australian incomes by the most in more than 30 years. Without shipments overseas, the economy would have contracted in the second quarter.

China's performance may be the key to whether the economy shrinks: A slowdown in Australia's fastest growing export market would hurt shipments of iron ore, coal, copper and cotton. Treasurer Wayne Swan said this week Australia may be hit harder than expected as the global slowdown spreads to the emerging markets that are among the nation's main trading partners.

``It'll be no mean feat for Australia to stay out of a recession,'' said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. ``Consumers and business are hunkering down across the world, almost as we speak, shocked to the core by the financial dislocation.''

Rio Tinto Group, the world's second-largest iron ore exporter, said yesterday it will cut output at its mines in Western Australia by 10 percent.

Waning commodity prices are forcing miners such as Oz Minerals Ltd., the world's second-biggest zinc producer, and Minara Resources Ltd. to cut jobs. They are also shelving spending on investment, which accounts for about a quarter of gross domestic product, up by about half since the start of the decade, according to Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney.

``All the economy's eggs are in the mining basket,'' said Walters. ``The ripple effects through the economy for the next two years will be massive.''

Economy to Contract

Walters predicts GDP will contract in the six months through March, trimming 2009 growth to 0.7 percent. Unemployment will more than double to 9 percent, he said.

A drop in shipments is also bad news for Australia's indebted consumers. The mining boom fueled a 30 percent surge in household incomes in the past five years, more than any other developed economy, according to the central bank.

Many households used the cash to take on debt, which almost doubled since 1999 to around 160 percent of incomes, a higher ratio than the U.S. and U.K., according to Shane Oliver, senior economist at AMP Capital Investors in Sydney. The median national house price soared about 140 percent in the same period.

House prices fell 1.8 percent in the third quarter and retail sales slumped the most in more than three years last month.

``The average person in the street senses something is wrong,'' said Macquarie's Robertson. ``Households and businesses are pulling in their horns. Whatever people were planning two or three months ago, much of it has been put on hold.''