Australia and Canada: Two resource-driven economies on divergent paths – by Richard Blackwell (Globe and Mail – August 7, 2013)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

Australia’s central bank has cut its key interest rate again, to a record low, underscoring concern that a global commodity slump and slower growth in China will weaken its resource-based economy.

The country is trying to kickstart consumer and business spending with the cuts because the mining sector has peaked and capital spending in that industry is falling, while economic growth posted by the country’s key trading partner, China, is slowing.

That’s a cautionary tale for Canada, which has a similar resource-based economy, dependant on exports. Weaker commodity prices help to explain, for example, a near-one-third drop this year in the share price of Vancouver-based Teck Resources Ltd., which ships about 15 to 20 per cent of its coking coal output to China.

Still, there are enough differences between the two countries, economists say, to insulate Canada from the economic turbulence facing our antipodal cousin.

For one, interest rates are at entirely different levels in the two countries. While the Bank of Canada’s key rate remains at 1 per cent, the cut in Australia takes its rate to a record low of 2.5 per cent. Australia never made the deep rate cuts that Canada and the U.S. implemented because its economy was not hit as badly during the global financial crisis that started in 2008.

In a sharp reversal of fortune, the buffer that shielded Australia during the “Great Recession” – easy credit in China that kept construction in the country booming during the global downturn – is vanishing.

“Australia is coming at this from a very different starting point than Canada,” said Doug Porter, chief economist at BMO Nesbitt Burns, who noted that the latest cut by the Reserve Bank of Australia is yet another in a long series that began more than a year and a half ago.

That highlights another key difference between the two countries, Mr. Porter said. “Australia is much more directly dependent on China than Canada is.”

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