Is The So-Far Insulated Aussie Economy Now Under Any Threat Since GFC?

It’s been a decade since the global financial meltdown, which started with the bursting of US property bubble with severe banking, financial and economic consequences worldwide. It seems history is bound to repeat for the some of the countries that majorly escaped the brunt of economic downturn in 2008. One such zone that is looked upon through the lens is Australia as the economy had undoubtedly shielded itself during major financial crisis and had rather enjoyed consecutive periods of high growth rate over the years. For all the success that’s been seen in the past, at some point, it is believed that Australia will almost certainly now experience an economic downturn with worrying levels of household debt and high dependency on China exports.  Â

Australia was able to guard itself while rest of the world was reeling under economic gloom owing to its robust and sound position at various fronts. It survived the downturn relying heavily upon high export demand from superpower China. The banking system turned to be robust and sound as it had not accumulated much debt in its balance sheet. Also, unlike US, property was never cheap owing to high interest rate regime adopted by the Aussie government. In addition, strong fiscal initiative such as government stimulus of assuring for bank deposits for next 3 years during 2008, greatly insulated the economy.

Undoubtedly, Australia had adopted easy fiscal and monetary policy over a decade to shield itself from the GFC (global financial crisis) which poses serious threat to its economic growth sustainability. It cannot be denied that this liquidity was the major reason behind 2008 global crisis. US Fed had kept the interest rates too low for too long which caused a global quest for yield, resulting in a piling of debt based on the securitisation and financial engineering of high-risk mortgage backed securities. It is believed that over the past one decade, Australian economy is also seemingly following the US footprint and is heading on the same path of record high asset prices particularly real estate, mounting household debt, lower interest rates and reduced household savings. The fact that Australian economy has track record of 27 years of high growth trajectory raises serious concerns that this bubble is more likely to burst.

The economy is largely dependent on commodity demand from China which makes the entire high growth setup highly linked to China’s growth and demand for exports. The slowdown in China is likely to result in lower consumer demand thereby affecting Australia’s current account balance and national income. Then resultant unemployment and lower income levels are bound to have impact on household debt payment and property bubble.

Also, with lower interest rates and high housing demand, Australian property has enjoyed high price for a really long period. This means any possible reversal in interest rate can result in steep fall in real estate prices and thus a big blow to economic growth.

Economic history suggests that prolonged period of high growth, soaring asset prices & bubbles and large accumulated debt in Australia can have serious financial and economic consequence - When and How is something that needs to be monitored.

In such a scenario, the Reserve Bank of Australia is looked upon to play a significant role in sailing the ship through tough circumstances.

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