Australia to suffer massive downturn in economy

According to Australian industry forecaster BIS Shrapnel the Australian economy will peak this year and start a rapid decline in around two years.

The local and global monetary policy tightening cycle is also expected to weigh on the Australian economy which could be headed for a downturn similar to that experienced in 2000-2001, the forecaster said.

The Australian economy is currently experiencing a robust, business investment-driven upswing partly related to mining-related investment from the resources boom – though we’ve seen the beginning of a correction in the ASX, the Australian stock market over the last few days as commodity prices are starting to tumble globally.

BIS senior economist Matthew Hassan said “We’ll see quite a sharp domestic downturn, probably on par with what we saw back in 2000-2001 – we’ll see growth slow right off and employment stall quite badly."

"The Australian economy is moving through a rolling investment boom that started out with housing, moved on to mining and business investment more generally … with residential building set to chime in more strongly.”
Hassan said further interest rate rises in Australia and globally would put a further squeeze on households and housing markets over the next year-and-a-half to two years.

BIS Shrapnel has two more interest rate rises factored in over the next year, taking the Reserve Bank’ s official cash rate to 6.5% from the current 6%.

The Australian economy is inflation prone at the moment with a very low unemployment rate, tight labor markets and reasonably strong demand. However, already many knowledge workers are fleeing the country due to the high costs of housing – Sydney already has one of the highest ratios of cost to income in the world.

As we’ve previously outlined, the economy is currently being ‘prime pumped’ by highly volatile capital from commodities. Successive governments have squandered this on creating an unsustainable ‘feel good factor” in order to appease the populous.

Hassan notes "What they (rate rises) will do though is put another squeeze on households and cause a further weakening in housing markets and so that takes a little bit more heat out of the demand side of the equation.”

As in the previous housing boom in the early nineties we suspect that there will be a rapid backlash as the current ‘cooling’ of the housing prices escalates to become a bust. The difference between then and now is that much of the property investment came from overseas (Japan mainly), this time however, due to restrictions in overseas investment -put in place in the mid nineties – property investment has been funded primarily by Australian household debt – this has far worse consequences for Australians as a whole because this time it will be they, not the overseas investors, who carry the can.