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.

Why an Interest Rate Cut Won’t Save Property Prices

What’s really driving down the prices of property right now is a post-Royal Commission crunch in credit availability.It’s not that the banks don’t have money to lend. It’s that they’re constrained by a new-found focus on ‘responsible lending’.

Your Vote Doesn’t Matter, Your Data Does

Maybe you have no god damn idea about any of those things. But maybe, just maybe, you do care about the future of your country. Maybe, just maybe, you want to vote to choose what you see as the best representative of your views and beliefs in the governing of Australia.

The State of Australia’s Economy Still Baffling RBA

The tension between Australia’s weak economy and strong employment is mystifying, even the nation’s most qualified economists. So, don’t be too bothered if you are a little out of your depth when it comes to Australia’s economy. But, the RBA has been crippling with such tensions for years...
Money Morning Australia