Why the US still matters to Australia

A severe recession in the United States would hurt Australia.

Investors with money in Allco or ABC Learning won’t need to be reminded of that.

Some analysts, though, have been arguing that Australia would escape the worst effects of a US recession, because we don’t sell all that much, at least directly, to the United States.

Demand from China and India would see us through it, the argument goes.

The Prime Minister, Kevin Rudd, reminded these sceptics last night just how important the US still is to us.

He was speaking on the eve of his departure on his first big overseas trip, on which he will visit 17 countries, including the United States.

“The United States is the biggest economy in the world,” Mr Rudd said.

“It is the largest trading nation in the world.

“The US dollar dominates global financial transactions.

“For Australia, too, the United States is a crucial economic partner.

“Our trade is robust – it was worth around $A47 billion last year, making the US our third-largest trading partner overall.

“The US also accounts for nearly 30 per cent of our incoming investment and for nearly 40 per cent of our outwards investment.”

Mr Rudd said, too, that the United States is more than a close economic partner of Australia.

“In many ways, it plays the most important role in sustaining global growth and sustaining the momentum underpinning open global markets.

“US leadership is crucial to getting a good outcome on the Doha Round of trade negotiations,” Mr Rudd said.

“An outcome that delivers immediate market access gains will give a much-needed confidence boost to business with a signal that the governments of the world are committed to ongoing trade liberalisation,” he added.

Mr Rudd admitted that the United States could not achieve this result on its own.

He said co-operation by all advanced countries would be needed.

Meanwhile economist Alan Langford, of HSBOS, warned that the volatility in US markets is not yet over, despite recent gains on financial markets.

He said, too,  that key risk premiums at the shorter end of the US debt market “remain contained” but “still well above normal.”

But, Langford adds:”…longer dated spreads are now approaching the highs they hit in the early part of the decade…”

That was when Enron and WorldCom sent B rates 10 year corporate bonds as much as 750 basis points above risk free US government paper of the same duration.

The implications, for a capital hungry country like Australia, should be obvious.

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