Friday, September 09, 2005

Australia-the lucky economy

They don't call Australia "The Lucky Country" for nothing. At least so far it seems that the Australian economy could escape the negative repercussions of its economic mismanagement.

In a article last year in the Australian misesian web publication Brookes News, I pointed out how the Australian economic boom was driven by two factors, neither of which were likely to be sustainable: rising commodity prices (Unlike most rich countries Australia is a large net exporter of commodities and thus benefits from it) and a housing bubble.

I also predicted that just how bad the overall economy will come out from this depended on whether or not the two factors would end simultaneously or not. If they did, then Australia would suffer a severe recession. If however, they deflated at separate occassions then Australia might escape this without a recession.

Well, we have now seen how the housing market have started to decline, but as commodity prices have risen sharply, Australia have continued to have higher growth then nearly all other rich countries except Hong Kong and Singapore. According to the latest GDP numbers, the volume measure of GDP rose 1.3% over the latest quarter and 2.6% over the latest year and the more relevant terms of trade adjusted measure Real net national disposable income rose 3.1% over the latest quarter and 4.3% over the latest year.

This despite the fact that residential construction have fallen 5% over the latest year. Because of the incredible Australian luck though, this have been more than compensated by the fact that the continued boom in China and other Asian countries have raised commodity prices so much that this have more than compensated for the weak housing sector.

Of course, this doesn't mean that Australia will necessarily escape without any future recession. Despite the weak housing sector, many imbalances including the large current account deficit and the negative household savings rate is still there and if these are not corrected before the economies of China and the rest of Asia cools significantly and in the process drags down commodity prices, then Australia might still suffer a sharp recession. But so far, Australia have been very lucky to see commodity prices rise while the housing bubble have been partially deflated.


Blogger gonzalez2002 said...

Hello Stefan,

If you think Australia's been lucky, just take a gander at Spain.

Spain's GDP growth has outstripped that of the rest of the euro zone countries for the past several years purely on a housing bubble. Unlike Australia, Spain has no commodity exports to speak of, in fact, the trade deficit in GDP percentage terms is worse than the United States'!

But here's the real scary part: this housing bubble has led to a serious misallocation of resources. How serious? How about housing production to the tune of 750,000 units this year. That's more than the rest of the euro zone combined!

Another thing, Australia (just like the UK) was able to raise interst rates to cool off the bubble. But guess what? Spain is stuck with eurozone rates at 2%. With inflation at 3.3 per cent, that's free money, baby! And when you're giving something away for free, you can anticipate the consequences. Astounding credit growth!

I'm amazed at all the coverage the housing bubbles in the "Anglo-Saxon" economies have gotten, when Spain, the no. 8 economy in the world by some measures, is the biggest train wreck waiting to happen.

Please take a look at Spain, I'd like to see your take.

People see the Spanish housing bubble (like the Economist)and go, "Ho-hum, where isn't there a housing bubble?" But look at the unique aggravating circumstances in Spain: no interest-rate control, no possibility of devaluation, massive overproduction of housing.

3:16 PM  

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