posted on Aug, 30 2012 @ 03:40 AM
Well there's a debate brewing in Australia over the health of the economy and one that seems to be gaining widespread commentary from around the
The point in contention is the mining boom with varying degrees of speculation from the boom is now heading into imminent bust though to continued
activity with investment projects in the pipeline painting a positive economic future.
Hmmmm I tend to lean toward the former view myself and it is mainly because of China's situation that I hold a relative pessimistic view, though I
consider that to be more cautious than doom and gloom. If our main customer dramatically cuts purchasing, then it's going to adversely impact the
Australian economy in a major way.
We have little to offer in productivity terms in other industries. Manufacturing is in decline and even our housing industry is softening which are
rather ominous signs in and of themselves, especially given that we are currently suppose to be in a mining boom.
The Australian mining industry is significantly buoying the economy of which without, will invariably fall into recession and it is going to be
interesting watching politicians and economists scramble to attempt to rectify, or at least, mitigate the situation.
Warning: after boom it'll be Dutch and go
Ever since investors got jittery about a Chinese hard landing, global analysts starting predicting that Australia was in for a rude shift in its
In April, Dylan Grice from major European bank Societe Generale wrote that Australia is "a credit bubble built on a commodity market built on an even
bigger Chinese credit bubble."
Grice summed up his beliefs claiming that "Australia looks like leveraged leverage, a CDO squared".
While the calls look to be over the top, Australian fortunes have been changing throughout 2012.
In August, BHP Billiton the world's largest miner reported a 35 per cent fall in profits. Shortly after that announcement the Federal Resources
Minister Martin Ferguson officially called the mining boom over.
"Look at Europe, the state of the European and global economy. Think about the difficulties in China. The commodity price boom is over and anyone
with half a brain knows that," said Ferguson.
On top of that, prices for Australia's biggest export, Iron ore, have dropped 30 per cent in the past two months and are about 30 per cent below the
prices that the government used to forecast $66.9 billion in revenue during 2012-13.
While many in Australia, including the Reserve Bank of Australia, aren't buying into the claims Australia is heading for a financial cliff, the
following comments from global analysts are troubling:
*"I felt more relaxed when Australians called themselves the lucky country with their typical honesty, realism and humility. Now that it's been
upgraded to the status of miracle I'm worried," said Dylan Grice after a recent trip to Australia.
* "Right now is not a time to be buying real estate in Australia. The market has slowed substantially but residential prices are likely to fall up to
60 per cent, possibly even more, within five years," said US real estate analyst Jordan Wirsz earlier in the year.
* SocGen's analysts recently wrote, "The strength of Australia is particularly hard to explain, given the recent weakness in figures like the
* Last week, Deutsche Bank's Adam Boyton and Phil Odonaghoe warned of the end of the investment boom and a 2013 recession in Australia. "It does
seem to us that there is some complacency surrounding the prospect of a sizeable decline in the terms of trade – and some over-confidence that the
investment pipeline is 'locked in'. While there may be reasons as to why this time is different ...history would counsel some caution on the
investment outlook. Indeed, an average response to a circa 15% decline in the terms of trade would see business investment falling in year over year
terms by early 2013."
AUSTRALIA faces a run on its currency, a deeper collapse in housing prices and a bank funding crisis to rival Europe's as it tries to come to
grips with life after the mining boom, according to a report from a boutique US advisory firm.
Entitled Australia: The Unlucky Country, the report from Variant Perception argues that Australia faces a classic case of Dutch Disease, the erosion
of capability that flows from a resources boom and an overvalued exchange rate.
"The mining sector has crowded out almost all other sectors of the economy and also funnelled credit and liquidity into a housing bubble in the real
estate sector," says the report, which has been circulated among global money managers.
The Australian dollar is overvalued on most metrics, one being the hamburger-based Big Mac Index, which has the Aussie 15 per cent to 20 per cent
above par, Variant says. But it will need to fall well below par and stay there for some time for the rest of the economy to come to the fore after
"It will be almost impossible to move mining capacity to other sectors in Australia," the report says.
"This is a classic problem for economies who suffer from Dutch Disease. When the hangover arrives, writing off production capacity is often done at a
considerable discount to cost.
''In addition, the manufacturing sector is under-developed and will not be able to take up the slack for the loss of momentum in construction and
The report came as June construction figures released yesterday showed housing at its lowest in a decade, down 15 per cent from its peak two years
ago. Non-residential building fell almost 20 per cent after the wind-up of the Building the Education Revolution program. Variant says the Aussie
might slide smoothly as a result of the Reserve Bank cutting interest rates, or it could fall suddenly in a European-style crisis in which foreigners
pull out of Australian banks and corporates.
"A total funding need from external sources of 40 per cent is extraordinarily high,'' the report says. "This increases the risk yet further should
Australia face a funding shock, driven either by events at home (a severely slowing economy), or abroad (e.g., a euro-driven credit event).
Australia's net external debt levels resemble those seen in the European periphery. Its net international investment position is deeply negative,
worse than that of countries such as Turkey and Brazil."
Variant says the Reserve Bank will come to come to the rescue of the big four Australian banks in a crisis because they are too important to fail.
But Australian analysts dismissed many of Variant's conclusions as nothing new. "They've discovered the current account deficit," said one. "We
discovered it in the 1980s and got on with our lives.'' Annette Beacher, the head of Asia-Pacific research with TD Securities, said the analysis was
''There are scant fundamental grounds for comparing Europe with Australia,'' she said. ''Australian banks loosened their prudential standards on
home loans only very briefly in 2006-07, and certainly learnt their lesson for the subsequent commodity boom.''
She noted that Australian banks were extremely profitable and now far less dependent on overseas markets for funding.