The great Australian bust is upon us

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Sorry to say it but our luck has run out. Recession is coming and it will be before 2017. There are five forces coming together that are about slam the economy to the ground.

1. China hard landing

China is in a hard landing. It may be that China can keep the consumer afloat despite the Shanghai crash but the investment component of GDP that supports commodity prices is declining fast and will keep doing so as real estate fails to recover. As such commodity prices are crashing. Iron ore and two coals are headed straight to undreamed of lows delivering another huge income shock to the economy:

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2. Pro-cyclical tightening in housing

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It is clear that APRA and the RBA waited far too long on macroprudential measures. Now they are tightening fast right into the rising gale of an huge commodity price crash. Investors are the target and they’re the driving force in the market. The same can be said of the Federal Government’s moves to tighten rules around Chinese buyers. Moreover, the Shanghai and commodity crashes raises the distinct prospect of margin calls and forced sales of Australian property:

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3. Grexit shock

My best guess is that the Grexit process will not be another Lehman-like event but it’s going to be very troublesome. The odds favour Greece leaving and defaulting. This is going to raise bank funding costs in Australia and the banks will not pass on all rate cuts:

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4. Consumer shock

The consumer is going to wilt. The country is currently run by a pack of fools and pretty much everyone knows it. The stock market correction and capitulation in RIO and BHP will hit them. Stalling house prices are the coup de grace:

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5. Capex cliff

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Capital spending is scheduled to plunge for another three years on the mining investment and vehicle assembly wind downs. It is going to get worse not better as the above hits consumer and business confidence:

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It’s not all bad news. More stimulus is coming. Expect emergency RBA rate cuts before year end. Fiscal stimulus will also be needed. The last of our bullets will be fired in short order and the Australian dollar will fall sharply. LNG volumes will add to GDP and some resource projects as well as residential apartment projects will support employment a little longer. But it is all far too little too late.

To end on a lighter note enjoy the Lonely Island’s depiction of the Australian economy:

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.