At a glance, the Australian economy is as safe as houses, but those houses may just have been built on sandy foundations. Federal treasurer Scott Morrison recently claimed that Australia was in ‘surprisingly good shape’ having snatched the record for the longest period of growth without a recession from the Netherlands. Indeed Australia has seen its 104th consecutive quarter of growth, but if this stat tells us anything, it should be that all good things inevitably come to an end. What does Australia really have to show for 26 years of apparent success?
Built on dumb luck
A wide range of factors have contributed to the success of Australia in recent years, but some of Bubbles these may be about to come to an end. Our growth and successful development has in large part relied on the fact that Australia is a relatively large nation with an abundance of natural resources that have been in huge demand, from China in particular. Over one-third of all of our merchandise exports, which includes everything we make and everything we dig out of the ground, goes directly to China, making our economy completely reliant on this trade.
There are only 13 nations in the world with greater trade reliance on China and Australia sits just behind the Democratic Republic of Congo and Lao People’s Democratic Republic in this regard. We’re also just ahead in terms of reliance of the Central African Republic and the Islamic Republic of Iran. This company does not ring of economic security, so alarm bells should be sounding. Our reliance on China is a sandy foundation that we need to be wary of.
Bubbles on bubbles
The Australian economy has inflated on a series of bubbles over the past 26 years. There has been a property bubble, a mining bubble and a commodities bubble, which have all been driven by the aforementioned reliance on Chinese trade. The result of this is that we all have huge amounts of debts and our economy is buoyed almost entirely by the things we can dig out of the ground. Home loans are at a record high and 34.5% of mortgages are interest-only loans, meaning that the debt is not even being repaid.
A bad day for China is a terrible day for us
As our reliance on China is so strong, our fate is directly tied to that of China’s. With our natural resources declining at an incredible rate, there is an inevitable end point to this reliance. More likely than the inevitable crash when the resources run dry, however, is the inevitable cessation of purchasing by China. China is on a path to financial ruin and there is an anticipated $1.7 trillion loss on the way from a likely bank crash. Leading economists are predicting a financial crash in China that could exceed 400% of the US banking losses. With such a bleak outlook for the Chinese financial system, the future for Australia is not looking good. A hard landing for China will result in horrific consequences for Australia and we need to prepare for it.
The Australian economy has been built on sand and, unfortunately, high tide is nearly due.