Thursday, March 16, 2006

Aussie Economy: Weak Housing vs Strong Commodity Sector

I first wrote about the Australian economy in an article in November 2004 at the peak of a long economic boom in Australia. At the time, Australia had a cyclical boom driven by two factors: 1) rising commodity prices which in turn were driven by China's strong boom 2) A housing bubble. I pointed out that neither are sustainable in the long run, but that the fate of the Aussie economy depended upon whether they ended at the same time or not. If it did, Australia would suffer a sharp recession. If it didn't Australia could get away with a "soft landing".

In September last year, I followed it up with a post where I pointed out that it seemed like Australia once again earned its reputation as "the lucky country". The housing bubble had started to burst, but the economy continued to grow because the commodity price boom had continued.

Now that the Reserve Bank of Australia have released the numbers of the latest GDP report, this overall picture of strong commodity sector and weak housing sector is roughly unchanged. Despite the weak housing sector, terms of trade adjusted growth remains higher than in most other rich countries.

Dwelling investments (i.e. residential construction) have now fallen to 6.4% of GDP, down from a peak of over 7% of GDP in the first quarter of 2004. Meanwhile, business investments have risen from 14.9% to 16.5%. The proportion of this going to the commodity sector is not specified, but it seems likely that most -if not the entire- of the increase have gone to the commodity sector.

The current account deficit have during the same time fallen relative to GDP while the household savings rate is somewhat less negative. The imbalances of the Australian economy created by the housing bubble have thus lessened somewhat as the bubble have partially deflated, but they are still significant. For the Aussie economy to continue to escape the recession that normally follows a bubble as significant as the housing bubble of recent years, it will have to experience continued luck in the form of continued commodity price increases.


Anonymous James said...

I've had a quick look at your blog. My wife is Swedish so I take an interest in Sweden. We go to Sweden each summer.

I have two properties in Australia, so I take in interest in the housing bubble. Property prices have fallen slightly over the last 2 years but not dramatically so(at least where I live). I have been waiting for the economy to nosedive but that hasn't happened yet. We might come out the other side of this without a recession if property prices remain flat and other areas of the economy gradually pick up.

Anyway, interesting to read your views. I will hopefully be back in Sweden in September.

1:23 AM  

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