The perfect Australian storm

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A near perfect economic storm is sweeping towards Australia. It comes in the form of the moves by three economic superpowers all acting in their own interests and against those of Australia simultaneously.

The first storm is China where what was already a hard landing is going to get worse and drive commodity prices to new lows even faster than before. Iron ore is clearly going to average below $40 next year and wipe out profits for the entire mining sector, destroying the Budget outlook and leading inexorably to a sovereign downgrade:

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The second storm is Europe and Grexit which is firming up by the day. If Greece goes it will have to default on a lot of money to Eurozone institutions and they in turn are going to seize Greek assets. It will be fiscal chaos managed by politicians across nations with huge historical enmities for month after month. Peripheral bond yields are going to rise despite ECBQE and so are bank funding costs, likely not as far as previous European crises but far enough. The CBA CDS price added 2bps yesterday at 68.5:

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The third storm is that the US is going to have to pause rate hikes and even resume QE. That is going to continue to slow (though not prevent) the fall in the Australian dollar until the RBA finally wipes out the carry spread. Thus income relief from the external shocks here will be slower and lower than is normal or desirable.

There is a good chance that Australia will be in recession by Christmas. Once unemployment starts to rise strongly the next shoe to drop is house prices. Expect emergency rate cuts, fiscal stimulus, moronic captain’s calls, and a house price bust for the ages anyway.

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Almost unbelievably, this could all happen without a global recession.

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.