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.

Aussie Property Prices: The Marginal Idiot Rules

Interest rates are falling — and likely to fall further. This might help some of these struggling mortgage holders get out of arrears or be able to reduce their monthly payments. But it’ll also allow new borrowers to borrow more.

It’s All or Nothing: Trade Relations with China

The rise of the Chinese century created mass wealth for those Australians lucky enough to ride the stock market and property tail winds that came with it. And today, China remains far and away our most important trading partner...

Australia’s War on Freedom

There’s a war on freedom going on. But it’s got nothing to do with religion. We here at Money Morning have been watching this unfolding situation for a while.

Welcome to Australian Authoritarian Rule

The primary form of authoritarian rule in Australia comes via economic and financial control. You might think you have financial freedom. But the reality is the government can change the game, the rules and make you suffer for it, at any time.

Property Market about to Bounce?

It looks like the powers that be are determined to get our property market shooting higher again sooner rather than later. We’ve had two interest rate cuts and now APRA has announced that banks can lend people more money based on the amount of money they earn currently.
Money Morning Australia