Feb 03

A Must Read on “The Economic State of Australia”

Can’t believe I missed this…one of the finest finance thinkers around, Satyajit Das, has a blog entry on Economonitor discussing the current risks of the Australian economy…please click here for Part 1 and here for Part 2. So these are the must read, not Fureyous… 🙂

In these articles Das eloquently articulates the major influences on the Australian economy (China, Europe, Cost of funding, commodites, etc) and breaks down how these could play out.  I enjoyed his comments on why Australia handled the GFC better than others

APRA and politicians take credit for the banks being relatively unaffected (during the GFC). This is curious given that banking regulations are largely uniform around the world. One can only assume that Australia has superior regulators and politicians to the rest of the world – an example of “Australian exceptionalism”.

In reality, Australia’s swift recovery was driven by large cuts in interest rates, government guarantees for banks, government stimulus and a commodity boom

and his concuding remarks cannot be discounted

Australia remains vulnerable. A slowdown in Chinese growth and fall in commodity prices and volumes would affect the economy adversely. Australian history suggests that mining booms are finite and end suddenly causing significant disruption.

Problems in sovereign debt and attendant pressures on banking system may decrease available funding and increase borrowing costs for Australian banks and companies. Overvalued house prices and high household debt increases vulnerability to an economic slowdown, with an accompanying rise in unemployment or to higher mortgage rates. A credit crunch or recession could cause house prices to fall worsening domestic conditions, which would in turn affect domestic banks.

The perfect storm for Australia would be the coincidence of those events.

Das mentions the key positives for Australia, which are our low levels of  government debt, interest rates with room to move, and the abillity for our currency to significantly depreciate. However the complacency that I believe exists in this country that I’m unsure we ackowledge is that just because we made it through the GFC and have had 20 years of consistent economic growth without a technical recession…

Australia’s economy remains vulnerable to a variety of external factors over which it has no control.


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  1. Scott

    “In reality, Australia’s swift recovery was driven by large cuts in interest rates, government guarantees for banks, government stimulus and a commodity boom.”

    One wonders if it weren’t for the “commodity boom” if any of the other stuff would have worked (ie. interest rate cuts and bank guarantees). Probably not. The evidence shows it didn’t work for Europe, neither did it work for the US. Credit where credit’s due.

    1. michael

      You may be right but Australia’s interest rates certainly didn’t get anywhere near as low (RBA stopped at 3%) as those in the US (0%) or Europe (1%) so there was still one trick up our sleeve. The US hit zero rates with nowhere to go and Europe’s problems have been exacerbated by flaws in the single currency regime…Australia had neither of those problems and you are probably right, thanks to the commodities boom.

      In addition, Australia’s property market held up a little better (although its unwinding now) so this didn’t place too much pressure on our banks and there’s no doubt that if it wasn’t for the government guarantee probably every bank outside of Australia’s big 4 would have become insolvent.

  2. Andrew

    2 Great articles where I think Mr Das hits the spot. Lucky resources but we pay people too much in mining and with the deceleration of China Australia will lose it’s competitiveness.
    I would be interested to see what Mr Das/others would do if they had a property portfolio (mortgage of 40 percent of value ). Sell now while Australian dollar is strong or wait and ride with commodities? Rental in WA is ok.
    Any ideas, comments?

    1. michael

      The success of a property portfolio (and I assume you mean residential) is determined by numerous factors of which the overall strength of an economy and interest rates may have a large impact or very little at all. I say that because a property portfolio is more likely to be impacted by idiosyncratic risks, such as the town/city’s economic strength or local council decisions, local company decisions, etc. So, at the risk of being boring I wouldn’t relate the Australian dollar or commodity prices to a property portfolio at all. For the larger cities, the interest rates and economic strength do have a larger impact and it looks like interest rates are more likely to go down (which is good for property) but that is because economic strength is expected to decline (which is bad). Sydney property appears very very expensive (as does most capital city property) and the rental yields are generally low, but then that depends on the price point and specific location which is obviously variable.

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