Australia's "Boom"
A Bloomberg headline caught my eye the other day regarding Australia. BIS Shrapnel apparently feels that "Australia’s economy will accelerate over the next two years before building 'into a boom' amid a surge in business investment."
Gross domestic product will rise 2.7 percent in the 12 months through June 2010, 3 percent in fiscal 2011 and 3.8 percent the following two years, the Sydney-based forecaster said today.
A surge in house construction and government investment in infrastructure such as schools and roads will help stoke economic growth, BIS Shrapnel predicts. Inflationary pressures, leading to higher interest rates, will increase in three to four years as a mining expansion intensifies.
I am no expert on Australia, but I am a regular reader of Steve Keen's blog, and happen to agree with his theory that Australia is in the middle of a massive credit bubble. Though Mr. Keen recently lost a bet with respect to Australia's housing market, I still believe he has the right idea longer term. Interested readers will want to check out his new site on the topic. From this site:
The first graph above shows the continuing housing bubble that I believe exists in Australia. While BIS Shrapnel suggests "A surge in house construction...will stoke economic growth," I happen to believe that Australia may run into the same problem plaguing the U.S with housing and construction right now -- Australia's bubble may even be bigger! The third graph shows Australias rising private debt to GDP, and the second graph shows where the debt is rising the quickest --mortgages.
Central Bank Signaling Weakness?
I have no idea when the housing bubble will actually burst, but all of these graphs provide strong evidence that there may be a bubble. These are not the only signs we have, however. On February 2nd, the Australian Central Bank failed to raise interest rates as was the overwhelming general consensus among economists.
“The rapid adjustment process is over and the rate hikes, when they do come, will be further apart,” said Matthew Johnson, an interest-rate strategist at UBS AG in Sydney. “The overarching message from the Reserve Bank is that while things are better than we thought, we’re not out of the woods just yet.”
It appears that Australia's Central bank may be beginning to fear the future, and the bursting of this bubble. It may not be long before the Australian Central bank finds itself racing towards 0% interest rates as the US and other parts of the world were doing in 2008. Also, with regards to not being "out of the woods" yet, I would say this is probably very understated. Not only is Australia "not out of the woods just yet," but the worst is probably ahead of them rather than behind them. The article continues:
“Three consecutive hikes late last year coupled with out- of-cycle increases by commercial banks appeared to have stung,” said Prasad Patkar, who helps manage about $1.5 billion at Platypus Asset Management in Sydney. Today’s decision “reduces the serious risk of a policy blunder. A pause is welcome.”
Sorry Prasad, but a serious policy blunder has already been made. Interest rates were kept too low for too long, and a credit bubble has already been blown. It has to be unwound eventually, It's just a matter of how bad Australia's politicians are willing to make the problem before it blows up.
Politicians Haven't Helped
Australian Politicians have been extending, increasing, and extending its First time home buyer "grant" for nearly a decade. To think this hasnt been a huge factor in the housing bubble is simply ignorant.
On 1 October 2009 to the 31 December 2009, $7000 will be provided only to home owners buying new homes or building a new home on top of the regular $7000 once off payment. $3500 will be given to home owners buying established homes.
On January 2010, the scheme will default to $7000 for all first home owners.
Type Scheme Eligible Dates Benefit Established Homes First Home Owner Grant 1 July 2000 - present $7000 New Homes / Construction First Home Owner Grant 1 July 2000 - present $7000 Established Homes First Home Owner Boost 13 Oct 2008 - 30 Sept 2009 $7000 New Homes / Construction First Home Owner Boost 13 Oct 2008 - 30 Sept 2009 $14000 Established Homes First Home Owner Boost 1 Oct 2009 - 31 Dec 2010 $3500 New Homes / Construction First Home Owner Boost 1 Oct 2009 - 31 Dec 2010 $7000
We can see the politicians have been at it for a while, offering up to $14,000 dollars as recently as September 2009!
Boom or Bust?
Australia is in a bubble, and judging from what the housing bubble brought to America, it is likely to bring a period of economic hardship to Australia, and very likely a prolonged recession combined with a period of deflation. Credit is beginning to tighten in Australia, and people are burdened with too much debt that cannot be paid off.
BIS Shrapnel thinks that Australia is poised for a "boom," I think they are primed for a "bust."