Less than a year ago economists were calling for oil at $200 a barrel, parity for the dollar, two interest rate increases and the resources super cycle to drive the economy for at least one more decade of growth.

How did it all go wrong? Are we just like all the rest – or can Australia pick itself up by the bootstraps?

The global financial meltdown took with it some famous names and with it much of the global economy. Can the Australian economy survive? The Reserve Bank of Australia (RBA) thinks so.

The Australian economy is in a very strong position compared to the United States, the United Kingdom and much of Europe. Our unemployment (January 2009) standing at 4.8 per cent is the lowest value this statistic had seen from its inception in 1978 to June 2006. Only a fool would not allow for the economy to deteriorate – but by how much? Do we have a saviour?

Australia weathered the Asian crisis of 1997/98, the tech wreck of 2000 and September 11 in 2001. We even blasted through SARS, which was reportedly going to end the world as we knew it. All this without one negative quarter of growth!

The China story, though, is one that fascinates me. Where did they go? Again, less than a year ago, China was calling for a lowering of growth from an unsustainable 10 to 12 per cent, down to 8 per cent. They got 9 per cent and everyone runs for cover.

Also a year ago, BHP managed to negotiate an 85 per cent increase in iron ore prices for 2008. The Chinese were reportedly displeased and the next round of negotiations for 2009 started late last year. What better way to negotiate than to say, “We don’t need you any more”? Small miners have fallen by the wayside with some, like Mount Gibson, OZ Minerals, Fortescue and RIO, having Chinese suitors all over them, buying or trying to buy into the companies. Can’t afford the iron ore, but can afford chunks of the company?

The story, though, is richer than that. Shipping freight rates (as measured by the Baltic Dry Index or BDI) for goods like iron ore plunged like a stone from more than $11,000 down to $663 in a month or two late last year.

The BDI then quietly crept up from the early December 2008 low to treble by February 2009.

We plot the BDI and the resources sector index of the S&P/ASX200 using a standardised scale in the accompanying chart. A pretty close correspondence indeed! We have no way of predicting the BDI with any reasonable degree of accuracy but it is somewhat of a puzzle why it hit such a low before Christmas and why it has climbed so steeply since. Indeed the growth in price in one week of February was by far the highest the index had experienced since data became available from 1985.

While the BDI might not seem that high compared to the previous few years, the February 2009 prices are at the top end of all prices from 1985 to 2003 – in fact the top 5 per cent.

With the BDI having turned the corner, the end of resources as we know them seems to be a way off. Will resources bounce back to 2008 levels? Probably not in the near future. But, as soon as the 2009 iron ore price negotiations have been finalised, some degree of normality might return. And with it, the rest of the Australian economy would follow.

Whether Australia has a brief skirmish with a couple of small negative GDP growth quarters to cause a technical recession isn’t all that important, so long as there is some solid resource-based growth to lead us out. The pain in a recession isn’t mainly that of the nosedive in but the long haul out. If the stimulus packages and interest rate cuts kick in quickly enough, perhaps we can avoid “the recession we didn’t have to have”.  

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