Picture this. Your company (until recently) was doing well. You had an amazing party (and another already planned) to celebrate its success, and gave bonuses to your staff.

The only problem is what you currently sell has more than halved in value, your clients haven’t been buying as much, and you have quite a bit of debt to service. Add to that, some of your executives have been doing some questionable practices, which is sapping confidence in your company – leaving the workers less motivated, and external clients worried.

Substitute your company for Brazil. The parties referred to are the Soccer World Cup & upcoming Olympics. Your product sales are the commodities of iron ore, oil and soy beans. Your executives are a corrupt government that has managed to shrink the economy by 1.9% in a quarter, or -2.5% p.a. Weak consumption, rising unemployment, rising inflation, high cash rates, and a growing budget deficit have conspired to put the economy into recession.

The China effect

The ramifications of the world’s second biggest economy slowing, are clearly far reaching. On IMF numbers, China has contributed more to global growth in the last 15 years than the US. Its growth rate to achieve this has been on average 10%, but has recently slowed to around 7% – possibly lower. It’s easy to see how recent forward looking data weakening has spooked markets.

We’ve written about this before in Casino Royale Chinese Style and Taking on the Sleeping Dragon – how the Chinese government is trying to reshape the economy.

Less Fixed Asset Investment, more Consumption. Less manufacturing, more services to drive growth.

As China transitions, there is less demand for capital goods and commodities. It’s not just Australia with big exposures to Chinese trade, there’s Brazil, South Africa (and other sub-Saharan countries), Japan and Europe. China likes to buy Japanese and European goods too remember.

Commodities and stocks have borne the brunt of these measures over the last few months, and now we are seeing the flow on effect to the countries dependent on certain exports. Canada has been punished by the weak oil price; falling into recession. Australia’s economic growth rate (GDP) for the last quarter was a paltry 0.2% (compared with 0.9% in the previous quarter).

Questions abound as to whether Australia’s prospects will go the same route as Brazil and Canada. Clearly Brazil has other issues at play, and Canada’s fortunes should be temporary given the US is on its door step.

Australia still has some fire power left, with a cash rate sitting at 2% and the AUD forecast to fall further. We shouldn’t rest on our 24 year streak of no recession though, as China accounts for one third of our exports. There is no doubt a solid and co-ordinated Australian and State Government response in investment is required for this pickle!