Australia shows it's vulnerable

Australia is now officially halfway to joining New Zealand's recessionary party.

Oddly enough the gloomy GDP data across the Tasman this week appears to have come as a shock to many who had hoped the Lucky Country might be immune to fallout from the biggest financial crisis since the Great Depression.

That the economy contracted 0.5 per cent in the December quarter - the first contraction in eight years - surprised most economists who were tipping 0.2 per cent growth for the quarter.

Australia's culture of confidence and exuberant optimism is generally regarded as something New Zealand should aspire to.

But it has its pitfalls. It can make you look foolhardy when things start to go wrong - witness the wheels falling off the Australian cricket team in India last year.

Witness also one of the last Western nations still seriously debating its chances of avoiding a recession altogether - well, up until Wednesday anyway.

The Australian economy has done better than most for longer than most. Just as we regularly beat the Green and Golds in the race to have 10 batsmen back in the pavilion, New Zealand has well and truly beaten its sporting rival into recession. But it is tempting to shout: come on in ya wuss, it's not that bad.

Australia's pathological fear of recession - like their fear of losing on the sporting field - may be a positive motivating force. But this time it has put them at risk moving too fast and too far with big spending plans.

They appear desperate to head off a downturn before it has even begun.

Given what we know about the situation in the US, UK and China, that doesn't look realistic.

Prime Minister Kevin Rudd has committed all of the the nation's substantial surplus to two stimulation packages.

He committed A$10 billion ($12.7 billion) in October to boost the housing market and consumer spending and A$42 billion in February to a range of initiatives from infrastructure projects to home insulation upgrades for all.

The measures will contribute to a likely Budget deficit this year of A$22.5 billion and leave little room for more targeted spending if the nation finds itself facing a longer and more serious downturn.

Based on what we have seen in the past few weeks the risks that it will are growing.

New South Wales has probably been in recession for some time. But the commodity boom in the mining states has kept the Australian economy humming and the Government coffers full.

Now the commodity slump looks ominous for Australia as China's economy slows rapidly.

Australia's mineral exports are more lucrative than food commodities in boom times but more vulnerable when global industry contracts.

Prices of food commodities rise and fall but volumes are less volatile. People will keep buying food.

Hard commodities such as iron ore and copper are destined for use in skyscrapers and new cars.

These are industries that have stopped dead - demand is in free-fall.

The Australian newspaper yesterday reported that Australia's exports to Japan dropped 21.5 per cent in January, with huge cutbacks by Japanese steelmills resulting in a 27 per cent fall in exports of steel-making coal.

Australia's total exports to India fell by 52.7 per cent, to Thailand the fall was 60 per cent, South Korea 36.9 per cent and New Zealand 41 per cent. Exports to the US were almost 50 per cent off a peak in October.

Australia has a lot of hope pinned on China, where sales of iron ore and other minerals were up in January in anticipation of the Chinese stimulation package boosting demand.

Australia has a bigger domestic economy than New Zealand but it is still small and export dependent.

Attempting to mimic the grand spend-up plans of Barack Obama and Gordon Brown might be politically popular for Rudd but as the slowdown starts to bite expect to hear the chorus of critics grow.