Monday, August 04, 2008

Australia Running Out Of Luck?

There are increasing signs that the Australian housing market has started to turn down. The Australian bureau of statistics today said that house prices fell during the second quarter, albeit only slightly. Meanwhile, money supply and credit growth seems to be decelerating significantly.

If this trend continues, then it is clearly a good thing, as the level of household debt has risen to alarming levels. The Reserve Bank of Australia (RBA) may not need to raise interest rates further, but it shouldn't start cutting anytime soon either (as some predict), as this might slow down the correction of these imbalances. Otherwise, they risk a repeat of the 2005 developments (more on that below).

I have repeatedly in the past said that as long as the price of the commodities that Australia exports keeps rising, there won't be a downturn in the Australian economy. And there is no sign of that. I reported recently how Australian iron ore exporters received an 85% increase in prices from their Chinese customers (They've pushed through similar increases from the Japanese and other customers). And other reports suggest that revenues from commodity exports will increase by some 40% in 2008-09 to $212 billion, something which is already resulting in a significant decrease in Australia's trade deficit.

For this reason,, Australia is not heading for a immediate downturn (at least not in terms of trade adjusted terms). The situation is in fact eerily similar to the one in 2005 when the housing market experienced a short-lived dip but the economy kept growing because of the commodity price boom. The housing market then soon recovered as money and credit growth remained strong. This meant that while Australia escaped a recession, they also missed the opportunity to reduce their imbalances. Now they have another opportunity to do that without significant pain. If the RBA starts to inflate more again, then this opportunity will also go lost. That means that the imbalances could remain until the commodity price boom turns into a bust. And the combination of a housing bust and a commodity bust would be very ominous for Australia. For this reason, the RBA should not loose its cool and start to cut interest rates at this point.


Anonymous newson said...

since december 2007, australia has experienced deflation!
the australian industry group's pmi has slipped under 50 (contraction).

aggregate figures hide the regional problems. the housing bubble has burst in sydney and melbourne, save for ultra-prestige market, which is doing fine everywhere.

whilst we are blessed by the abundance of natural resources, my money's on the government stuffing things up, right royal.

consumer/housing debt is stratospheric, though public sector debt is minimal. expect that to flip as voters react to bankruptcy.

4:25 PM  

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