Australian Economy

The simplest way to think about the Aussie economy is that it is driven by dirt and debt. Our commodity exports (led by iron ore) provide the income, which allows us to borrow and speculate on housing. Of course, low interest rates have assisted Australia in achieving the highest household debt levels in the world. In turn, interest rates are so low because of the commodities bear market that occurred from around 2011 to late 2015.

Australian Economy in recent times

As commodity prices fell, so did Australia’s national income. The Reserve Bank of Australia responded to this price fall by lowering interest rates from 4.75% in November 2011 to 1.5% in August 2016. This had the effect of setting off a housing construction and price boom. Rising house prices (via the wealth effect) encouraged consumers to keep spending. Consumption represents nearly two-thirds of economic growth, so this spending kept the economy healthy through the commodity price downturn.

Aussie Economic Risks

The biggest risk for the Aussie economy isn’t a house price collapse, as everyone fears. That will be a symptom of the problem, rather than the problem itself. The biggest risk is a sharp downturn in China’s economy. This will send iron ore prices and other commodity prices plunging back down again. A prolonged downturn in commodity prices will reduce Australia’s income growth. Given Australia’s high debt levels, falling incomes would spook our foreign creditors. This could lead to a plunging Aussie dollar, as foreigners hold back on extending loans to Australia.

So how bad is the Australian Economy?

Australia owes more than $1 trillion (net) to foreign lenders. So if they consider us a higher-risk destination to invest due to a weaker Chinese economy and plunging commodity prices, that could lead to a sharp slowdown and recession. Falling house prices would follow. This is a worst case scenario, but not out of the question if China encounters its own debt crisis.

Australia Day Is Fake News

You know what Australia Day really is? It’s the country’s first example of fake news. And we’ve all bought into it. Today, the war on fake news begins.

The Aftermath for the Bush and Business

See our local businesses, but especially retail, are also enduring hardship. The latest trade data posted on Thursday highlighted the ongoing conundrum. Record high exports to both the US and China has seen the surplus grow massively.

A Glimmer of Opportunity in Mining

Without mining, Australia’s economy would be a lot different. And probably a lot poorer. Indeed, my personal belief is that Australia must get cracking on things like renewable technology ASAP. Climate change politics aside, it’s a simple matter of hedging your bets.

Unemployment Rises, Markets Rejoice

The unemployment rate is up to 5.3%, moving away from the RBA’s stated goal of 4.5%. Nervous times for central bankers and government policy makers. Callous traders on other hand… Well, they were licking their lips.

Westpac and NAB Cut Dividends…What’s Next for ASX Bank Stocks?

Whether we like it or not, almost anyone with superannuation will likely have a holding in each of the big four banks. Banks are fighting on many fronts. Not least of all is capital. If they need to hold onto capital, that may mean further reductions in dividends. There is also the issue of margins and low rates...
Money Morning Australia