Recently I argued that the Australian economy is much closer to the US economy than we give ourselves credit for. One half of it at least is, the slow half (or should I say three-quarters):
In the slow halves of the two economies, housing and services, the US is deflating much of its debt and slowly working through its excess of housing supply. The aching post-financial crisis grind that afflicts all credit-bubble nations is advancing as banks slowly work off bad debts, asset prices return to historic trend and supply balances with demand. Sure it’s public sector is still building a serious liability as it supports this process but with the world’s reserve currency, it can.
Here, our private sector debt accumulation has slowed but not yet reversed. Asset prices remain at cosmological levels. The overbuild of houses is probably not as bad but post-bubble demand is not yet revealed. And the banks and parliament are in fairy land about the sustainability of it all. On the upside, the people have sensed that all is not right and are preparing for the worst by rebuilding their saving ahead of time. The RBA has encouraged this, knowing that the jig is up on borrow and consume.
Fact is, both economies are going through a post-GFC adjustment. I’d still prefer to be Australia, because we’re able to get through the adjustment with rising income from the mining boom rather than falling income, which is the usual path for post-credit bubble economies.
At the same time, however, there’s no doubt Australia had a better GFC than the US. Much better. We didn’t even have an official recession – two quarters of negative growth (though we did in GDP per capita terms). This was the result of two factors which, it truth, boiled down to one. The swift deployment of fiscal stimulus here and in China meant that we kept demand largely intact at home and demand for our exports was intact abroad.
So today I want to draw a second analogy, this time with the Chinese economy, with which we share the fast half (or should I say one-quarter) of our economy.
Comparing Australia to China is in some ways even more startling than it is comparing us to the US. First, let’s look at the effects of fiscal stimulus that carried us through the GFC. In China, the stimulus took the form of accelerated infrastructure projects and a credit-fueled housing construction boom. Take a look at this chart from Huy McKay at Westpac:
Yes, that’s a rather large ramp up in residential construction. And now, take a look at what happened here to residential building approvals during the GFC:
Not quite the same but not that far different either with an historic high of approval volumes and a clearly dramatic effect of stimulus. The point is made more clear when we add non-residential building approvals: