An interesting article appeared in yesterday’s Sydney Morning Herald entitled “Slugging it out over our future direction” (hat tip to John Murray for alerting me to it). In the article, investment ‘experts’ are asked to make predictions on the Australian economy for 2011. While a number of analysts are fairly positive on China and the Australian economy, two comments stand out for their overwhelming bearishness:
The global head of economics at Macquarie, Richard Gibbs, has warned that the mining bonanza is a fool’s paradise.
Gibbs believes China will increasingly look to Africa and Latin America as alternative sources of crucial commodities.
”As each year goes by, we get closer to the year when the Chinese are going to bring to the table significant new competing supply,” he says.
Australia’s two-speed economy, in which mining services growth outstrips other sectors, is a liability, Gibbs says. ”In the same way the gains in China were magnified in the Australian economy, any losses in China will be magnified. It is a double-edged sword.”
Investors should position themselves for a rocky ride over the next few years, Gibbs says, because ”this is not going to be smooth sailing; it is not back to business as usual”.
”I’d be looking at companies with good cash flow … continuing to keep some of my cash locked down in term-deposit facilities”.
…”Safe as houses” is a well-worn expression, but the MLC Investments strategist Brian Parker says the notion that Australian real estate prices can move in only one direction could go out the window. ”Residential property looks absolutely obscenely overvalued and seems to offer very, very poor investment prospects,” he says.
Wow. I couldn’t have said it better myself. As I have warned many times before, Australia’s over dependence on China and debt-fuelled housing growth is its key vulnerability.
Over the past ten years, Australia’s ‘miracle’ economy has ridden on the back of twin booms: the debt-fuelled housing market and the China-led commodities market. This dynamic is illustrated by the below chart, which shows the rapid growth of household debt levels, real house prices and the terms-of-trade (ToT) since 2000. Whilst other economies experienced hardship in the wake of the technology stock market crash of the early 2000s and the recent Global Financial Crisis (GFC), Australia’s economy has marched onwards and upwards.
However, from 2011 onwards, Australia’s dependency ratio is projected to worsen progressively as the baby boomer generation enters retirement. This increase in the dependency ratio will, other things equal, act to reduce Australia’s economic growth, consumption and asset values whilst, at the same time, requiring increased taxes. Readers seeking a better understanding of the impact of Australia’s ageing population are encouraged to read these articles.
Clearly, there are significant downside risks to the Australian economy. Anyone extrapolating the past decade’s performance into the future is bound to be sorely disappointed.