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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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