A quite lengthy article published back in November last year by Matt Barrie and Craig Tindale on Medium.com entitled, “Australia’s economy is a House of Cards”, gives us a comprehensive view of where the Australian economy is at present.
What is revealed should shake Malcolm Turnbull and Scott Morrison out of their overly optimistic complacency, but as unlikely as that is, the report warns of what is to come. It is a long and highly detailed read, so for those who are time-poor, here is an overview…
Australia’s economy is a HOUSE OF CARDS … a précis
In a nutshell, our economy has recorded its 104th quarter of growth through sheer luck, that luck being a combination of rich natural resources and China. Our economy is more dependent on China than any other OECD country.
“As a whole, the Australian economy has grown through a property bubble, inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.”
Looking down the barrel of some “staggering” losses by Chinese banks in what has been a “$34 trillion experiment” to create an economic miracle, the Chinese government is facing a meltdown likely to be far more catastrophic than the sub-prime meltdown in the US in 2008.
Such a meltdown will have horrific consequences for Australia. But that is looking at it from a purely selfish perspective. More broadly, the world could plunge into depression, with no further wriggle room for escape, given the present level of record low interest rates across the globe.
The US, Europe, the UK, Japan and China all fought the global financial crisis printing $19 trillion US, in exchange for various bonds and securities offered by commercial banks. It might have worked had that money found its way into the hands of those who would spend it buying goods and services.
But instead, that money was used by corporations in share buy-backs and property development (high-rise apartments) too expensive for the average consumer to afford. While brand new homes and apartment blocks with inflated values remained empty, they pushed up stock markets to new, unprecedented highs, despite no corresponding lift in company performance.
In the property bubble market, China was the main offender causing billions of dollars to flow out of the country by investors in search of more affordable opportunities that, in the process, set off a subsequent bubble wherever they went.
Back in Australia, we are the largest producer of iron ore (29%), in the world and 80% of that is sold to China. As we speak, a perfect storm is developing with other nations like Brazil ramping up their production and moving in on our market, at a time when China’s demand is in decline.
One doesn’t need to be an economist to see that the price of iron ore is set to take another savage dive. Coal is our next biggest export supplying 38% of world production. The long-term future for coal is not good. It’s use-by date is approaching.
Banks know this, but our government has its head in the sand. In the meantime, for miners in Australia, revenue is down and costs are up, meaning profits are dwindling.
In any event, Australia’s “economic miracle” does not come from mining or manufacturing. It comes from services. “With an economy that is 68% services, as John Hewson put it, the entire country is basically sitting around serving each other cups of coffee or, as the Chief Scientist of Australia would prefer, smashed Avocado.”
With an export market that delivers just 20% of our GDP and the value of goods and services produced barely above cost, little wonder we run both a trade and fiscal deficit.
When one applies the principle of the three sectoral balances to this equation, it means that the private sector is in surplus. A good thing, one might think, except that the private sector is not spending it.
Corporate investment has been dragging its feet waiting for the government to lead by example. Consumers are using their money to pay down debt rather than buy goods and services, or hanging on to it in anticipation of trouble ahead. Retail trade figures confirm this.
The only thing keeping Australia in growth mode now, is the property bubble. It’s a bubble that is helping to sink average working Australians further and further into debt.
Meanwhile, the only thing enabling them to meet their mortgage payments is the low interest rates they are paying. Fortunately for them, that will continue for some considerable time yet, because the RBA has precious little to offer the country in terms of monetary policy.
But when consumers start to lose their jobs, the spaghetti will hit the fan. 60% of Australian bank loans are mortgage loans. This is consumer debt, not productive debt. This is a disaster waiting to happen. And it’s not as if we never saw it coming.
Australians have the second worst household debt servicing ratio in the world, spending more of their income paying off interest that was, in 1989/90, double what it is now. We are about to experience an asset value collapse that could bring banks to the edge of insolvency.
There’s more bad news, particularly in the field of education, our third biggest export. Many have been warning about the oncoming tsunami, including Steve Keen, Bill Mitchell and others.
When it comes it will not be pretty. More importantly, it will set us back decades, all because we thought property portfolios sounded more glamorous than making cars.
Better we had made cars.