Today we have an important piece on the risks to the Australian economy from Jonathan Tepper via John Mauldin. In my view it is a must read for Australians and Canadians and everyone else who is looking to understand and anticipate changing trends in world markets today.
Both the Aussie and Canadian economies have enjoyed a huge boom over the past 10 years as the credit bubble drove demand for commodities in order to fuel surreal consumption of real estate and consumer goods. Over- investment into the mining and exploration sectors in both countries has been epic. Read: Australia: Running out of luck down under
“Australia is a classic case of the Dutch Disease, which is the process by which a resource boom leads to an appreciation in the currency that stifles the tradable sector (manufacturing). Classic cases of Dutch Disease are associated with excessive wage growth in the non-tradables sector leading to an appreciation in the real exchange rate. The adverse macroeconomic effects include potential overconsumption relative to future income and significant mis-allocation of capital as the windfalls from commodity exports are channelled into non-tradables (eg real estate and construction) where the risk of asset bubbles is high…
Australian banks will suffer. Indeed, Australian banks have recently outperformed their developed world peers but this is not sustainable given their vulnerability to external funding conditions and a slowing domestic market, putting a pressure on earnings…
Ultimately, our view is that the Australian economy is very similar to the UK economy in several respects (overvalued property market, excessive household debt, etc). In part, as a result of the mining boom and as a result of low global interest rates in the past decade, Australia has also had a severe housing bubble. This bubble is now in the process of deflating….”
Australian benchmark rates are higher today (3.5%) than in Canada (1%) so in that sense monetary policy has arguably more room to soften the downturn in Australia than in Canada where domestic interest rates are already miniscule. It is true that Australia is more tied to Asian demand and Canada more to the US. But once we understand that western and Asian demand have been two sides of the same credit bubble fueled coin over the past decade, we can see enormous parallels to the downside risks in Australia and Canada as well as other commodity-centric economies and currencies as this next global recession spreads.
From where I sit in Canada, very few people seem to be aware or prepared for the down side we are due following the now late-great commodities boom.
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