There's a serious possibility that iron ore price falls could trigger a recession and at the very least, future economic growth will be weakened
There's a serious possibility that iron ore price falls could trigger a recession and at the very least, future economic growth will be weakened. With iron ore constituting almost a third of Australia's terms of trade, the total hit over the next year will be about 9%. That's why national income is likely to fall over the next year and nominal growth will probably be weak. As a consequence, corporate profits are likely to fall, dividends and costs could be cut and government budgets will be stretched, possibly leading to more cost cutting and/or tax rises at a time of rising unemployment. BHP estimates that for every $1 fall in the iron ore price it loses $135 million in profit. Any fall in the Australian dollar may offer some relief but it won't fully offset the huge margin squeeze that is now underway. The profits of the big three are likely to take an $8 billion haircut. That means shareholders can forget about buy backs and growing dividends. (VIEW LINK)
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