From the AFR:
Modelling to shown by Deloitte Access Economics partner Chris Richardson at the National Press Club in Canberra on Wednesday shows a China crisis would wipe almost $140 billion from Australia’s economy, send unemployment up, cut house prices by 9 per cent, and destroy almost $1 trillion of national wealth.
The modelling, which underscores the degree to which Australia’s exposure to what happens in China is greater than at any time in the last two-thirds of a century, will also show that the federal budget would blow out by another $40 billion in over just two years.
“We’re out of ammunition to withstand a downturn caused by China,” Mr Richardson will say. “We don’t expect China to go down, but if it did, we’d be in the firing line.”
“Australian families have borrowed up a storm since the GFC, while housing prices in this nation are now dangerously dumb,” Mr Richardson will say in his address.
Deloitte estimates that house prices are now about 30 per cent overvalued when compared to national income – the widest gap in its data since the early 1980s.
And The Australian:
“Compared with the global financial crisis, Australia’s vulnerabilities are higher, our defences are weaker, and this time around China would be a cause of the problem rather than a part of the solution,” Mr Richardson says, in an advance copy of a speech to be delivered to the National Press Club today.
The Deloitte modelling is based on a scenario in which China’s growth rate slows from the 6.5 per cent targeted this year to less than 3 per cent.
It could be triggered by a trade war, a banking crisis or a loss of public confidence as asset prices fell.
Mr Richardson notes that Australia’s dependence on China is greater than with any other country since the relationship with the United Kingdom weakened in the early 1950s.
If the downturn began this year, it would reach peak effect by the first half of 2019. Employment would contract by 500,000, with half those numbers formally joining the unemployed and the remainder exiting the labour force.
House prices would fall by 9 per cent, stripping $600 billion from the wealth of families, while the sharemarket would drop 17 per cent, costing a further $300bn.
Although the Reserve Bank would respond by cutting rates and, when rates reached zero, by pumping liquidity into the market, Deloitte warns that global financial markets may become more reluctant to finance Australia’s deficits and may push rates higher.
While it is gratifying to see Chris, who is one of good guys, picking up MB’s “dumb bubble” moniker, the modelling is far too bullish. If China busts and Australia sees an 8% hit to GDP then house prices will fall by one third and the Budget sink into $100bn deficits per annum.
It’s all academic, really, the key message you should take out of it is when the next global shock comes both monetary and fiscal policy will be exhausted which means we’ll be defenseless to keep the bubble pumped up. Gerard Minack sent me a new chart yesterday that says it all:
Chew on that…
