For Leigh Davies, the good times ended with a phone call.
Until that day in mid-September, he could hardly keep up with all the demand for his firm's mining equipment. Like just about everyone else in the mineral-rich state of Western Australia, he was riding a worldwide commodities boom, ignited by China's seemingly insatiable demand for the riches beneath the Australian soil — iron and copper ore, zinc, magnesium, coal.
Then the phone rang, two days after the collapse of Wall Street investment bank Lehman Bros.: "We got a call from one of our better clients, saying, 'Most of our finances are tied up in Lehman bank, and we're suspending your contract until we get it sorted out.' "
From there, things got worse. Other clients, caught up in a sudden credit crunch, delayed or canceled projects, idling all eight of Davies' drill rigs for the first time ever. "We've got no work," he says.
In a matter of weeks, Australia's boom has gone bust. Now economists at Citigroup and JPMorgan Chase, among others, are forecasting that Australia's economy will shrink this quarter and next, tipping the land down under into a recession for the first time since 1991. JPMorgan sees the jobless rate — a record low 4% just 10 months ago — rising to 9% by 2010.
Davies is stunned by the speed with which it all unraveled. "The whole of Australia had been screaming for more drilling rigs and equipment. We had a severe shortage of manpower. It all stopped within two weeks."
"It was very quick," says Ron Wyndow, whose firm in Karrinyup, Western Australia, provides equipment and services to mining and mineral exploration firms. "It hit about eight weeks ago. Just, bang!"
The financial crisis is hitting debt-laden Australians hard. "We're headed for a recession for the same reason the USA is in one now — the bursting of a debt-financed speculative bubble," says economist Steve Keen of the University of Western Sydney, one of the first forecasters to sound the alarm. Keen says Australian households have been adding debt — as a percentage of economic output — even faster than their U.S. counterparts over the past 18 years. Now they're feeling pinched and are cutting back. "We have a homegrown recession coming our way, regardless of what happens in the rest of the world," Keen says.
"Shoppers are on strike," Canberra-based consultants Access Economics reported recently. "Their confidence is shattered, and they are pulling back sharply on discretionary spending." Access expects retail sales to drop 0.1% in the fiscal year that ends in June and to grow an anemic 0.9% the year after that.
Keen predicts the downturn will unfold a bit differently than it did in the USA, where problems began in the housing market and spread to the broader economy. "We're likely to go into the macro crisis first as debt growth plummets; then a housing crisis as the newly unemployed are unable to maintain their mortgages; and finally a credit crunch where the banks' solvency doesn't look so hot anymore."
China, Australia's No. 1 trading partner, isn't providing as much shelter as expected from the global economic tempest. China itself has proved unexpectedly vulnerable to slowdowns in the United States and Europe. Its economic growth is decelerating rapidly from the double-digit annual pace of the past decade. Last month, Chinese exports fell for the first time in seven years.
"China's economy has slowed much more quickly than anyone had forecast," says Glenn Stevens, governor of Australia's central bank. Add in China's plummeting stock market and crumbling housing prices, and "There goes Australia's China blanket," economist Keen says.
"We were living in a bubble in Australia, thinking that we'd manage because of China and because of our resources," says Nick Read of Drill Technics Australia, a Queensland maker of drill rigs. "The fact is, resources have hit rock bottom, and China is struggling also. It happened very fast."
Australian policymakers have responded aggressively to the economic threat. Stevens' Reserve Bank of Australia has been chopping interest rates. And the government of Prime Minister Kevin Rudd is spending more than $10 billion to jump-start the economy.
For now, businesses are hunkering down. Anglo-Australian mining giant Rio Tinto just announced plans to slash 14,000 of its 112,000 jobs. Drill Technics, its rigs running just half the time, has cut its drilling crew to 15 from 32. Davies has laid off 15 of his 27 workers. "If you want to be in business after Christmas, you have to cut costs," he says.