VZCZCXRO2844
PP RUEHPT
DE RUEHBY #1020/01 2840538
ZNR UUUUU ZZH
P 100538Z OCT 08
FM AMEMBASSY CANBERRA
TO RUEHC/SECSTATE WASHDC PRIORITY 0302
INFO RUEHBJ/AMEMBASSY BEIJING PRIORITY 9190
RUEHKO/AMEMBASSY TOKYO PRIORITY 3223
RUEHWL/AMEMBASSY WELLINGTON PRIORITY 5461
RUEHGP/AMEMBASSY SINGAPORE PRIORITY 1569
RUEHLO/AMEMBASSY LONDON PRIORITY 1873
RUEHPT/AMCONSUL PERTH PRIORITY 3912
RUEHBN/AMCONSUL MELBOURNE PRIORITY 5639
RUEHDN/AMCONSUL SYDNEY PRIORITY 3849
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 02 CANBERRA 001020 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN AS
SUBJECT: TOUGH WEEK FOR AUSTRALIAN ECONOMY 
 
REF: A. CANBERRA 1010 
     ¶B. MELBOURNE 114 
 
¶1.  (U) Summary:  This was a bad week for Australia's 
economy, primarily because of the effects of the global 
financial crisis.  Stocks down 16%.  Australian dollar down 
over 10%.  Commodities softening, confidence down, 
unemployment up.  Rudd is making reassuring statements and 
announced a new bank deposit insurance scheme, but people are 
nervous and the word "recession" is in the air.  End summary. 
 
Share Prices Plunge 
 
¶2.  (U) Australia has been watching the global financial 
crisis nervously for months, hoping it would escape without 
too much damage.  But this was a very bad week for the 
Australian economy.  Despite the Reserve Bank's unexpectedly 
deep slash of its key official cash rate (from 7% to 6%, ref 
A) and the subsequent interest rate cuts by the Federal 
Reserve and 20 other central banks, the Australian Stock 
Exchange (ASX) has followed Wall Street and other stock 
markets downhill.  The All Ordinaries index lost 5% in the 
first 15 minutes of trading, rallied briefly in the early 
afternoon, but ended up down 8% for the day, breaking (in the 
wrong direction) the 4000 mark.  For the week it has shed 16% 
of its value (A$170 billion) dropping to levels not seen 
since mid-2005. 
 
¶3.  (U) Although the GOA and the Australian Prudential 
Regulatory Authority assure that they are sound, Australian 
banks, despite the boost from the RBA rate cut on Tuesday, 
had a particularly bad day - each of Australia's big four 
banks was down 5% or more on Friday trading.  Struggling 
investment banks Macquarie and Babcock & Brown were both down 
over 10%.  The Australian dollar has dropped sharply, losing 
well over 10% of its value in a week - the biggest weekly 
decline since it was floated in 1983.  The Aussie dollar was 
near parity with the greenback in July at a peak of US$.985; 
it has dipped as low as US$.642 this week - and could weaken 
further if global commodity prices continue their drop.  The 
Future Fund (a sovereign wealth fund based on GOA surpluses 
to fund public sector pensions) is believed to have lost over 
A$2.6 billion over recent weeks. 
 
Commodities Weakening 
 
¶4. (SBU) Commodities have been the backbone of Australia's 
economic boom over the past five years, but weakness is 
developing there as well.  Mining companies in WA tell ConGen 
Perth of iron exports to China being postponed, news that is 
also reaching the press.  There are several factors behind 
this:  reduced Chinese steel output in the face of plummeting 
steel prices; declining demand for steel globally; and 
problems some Chinese traders report in getting credit from 
Chinese banks to finance imports of iron ore.  In Friday's 
trading, share prices for mining giants BHP Billiton and Rio 
Tinto were down over 6% and Fortescue Metals was down as much 
as 18%.  Businesses in Melbourne that had felt somewhat 
insulated because of the China effect now are admitting to 
ConGen Melbourne that it is no longer a question of "if" an 
economic downturn will touch them, but "when." 
 
¶5. (SBU) Agricultural analysts note some problems.  Until 
recently, Australian farmers had been somewhat sheltered from 
declining food prices by the weakening Australian dollar. 
Qdeclining food prices by the weakening Australian dollar. 
But now there are fears that some of the exporters who have 
replaced the former monopolist Australian Wheat Board are 
having problems accessing credit to buy wheat and other crops 
from farmers.  Farm groups are advising farmers to get what 
they can now, to be careful who they sell to, and not to sit 
on their products. 
 
Unemployment Up 
 
¶6. (U) The Australian Bureau of Statistics released the 
latest employment numbers October 9; seasonally-adjusted 
unemployment ticked up from 4.1% to 4.3%, still low, but a 
move in the wrong direction.  It appears likely that 
unemployment will continue to move up in upcoming months, 
with some forecasts that it could hit 6% in 12-18 months. 
 
Don't Panic 
 
CANBERRA 00001020  002 OF 002 
 
 
 
¶7. (U) Prime Minister Kevin Rudd has been busy pronouncing on 
the economy this week.  He pointed to overnight IMF 
predictions of 2%-plus growth to again assert that although 
things are "bad", the Australian economy would grow.  Rudd 
also reassured depositors that Australian banks are sound. 
And on October 10, Rudd announced new legislation to 
guarantee for the first time the first A$20,000 of all 
individual bank deposits (Opposition Leader Malcolm Turnbull 
said it should be A$100,000).  Banks' initial reactions have 
been divided, some asserting that the existing law which 
gives depositors first crack at the assets of a failed bank 
is adequate.  Treasurer Wayne Swan is en route to Washington 
to participate in Bank/Fund meetings and the G-20. 
 
¶8. (SBU) Comment:  Australia's economic problems should not 
be exaggerated.  Its banks appear to be sound, due in part to 
a different regulatory structure and less speculative 
mortgage lending.  But they are being hurt by the reduced 
availability of international credit to fund domestic 
lending, and by all the stories of troubled banks coming from 
the US and Europe.  The Australian economy, based on the most 
recent numbers, is still growing - but consumer and business 
confidence are down, and now some economists and analysts 
have begun to discuss the possibility of the first Australian 
recession since 1991.  As noted earlier this week (reftel b), 
any lingering belief that somehow Australia is "decoupled" 
from the US economy by virtue of the emergence of China as 
its top trade partner (an idea post always considered to be 
unsound) should be completely discredited now.  In fact, it 
is fair to ask now whether the commodities boom Australia has 
enjoyed since 2003 based in large part on China's appetite 
for Australian products might turn to bust - just as new 
mines and production facilities being built in response to 
high commodity prices prepare to come on line, bringing 
additional capacity to market. 
 
MCCALLUM