Australia’s economy is going down and under

[sakura]

 

Australia recently recorded its 104th consecutive quarter of growth without a recession, an achievement which breaks the record set by the Netherlands. It prompted Australia’s federal Treasurer Scott Morrison to claim that the economy was in “surprisingly good shape”. His statement is reminiscent of that old joke. How can you tell if a politician is lying? His lips are moving. 

Australia’s economy is not in good shape. Its growth has been built on demand for commodities like coal and steel from China and investment in an over-inflated property market that has been fuelled by years of cheap credit. These dual dependencies are about to be brutally exposed. 

The exact timing and full impact of Australia’s economic tailspin is unknown. However, a precise date and exact knowledge of its magnitude are unnecessary in order to take advantage of the collapse as a trader. The circumstances that make an economic crash inevitable are already in place and it is far better to be five months early rather than five minutes late for an opportunity like this. 

The inevitability of Australia’s financial meltdown is in part due to an external factor which it has no control over: China. 

Societe Generale’s China economist Wei Yao recently said: “Chinese banks are looking down the barrel of a staggering $1.7 trillion worth of losses”. Hyaman Capital’s Kyle Bass calls China a “$34 trillion experiment” which is “exploding”, where Chinese bank losses “could exceed 400% of the US banking losses incurred during the sub-prime crisis”. 

Simply put, if China’s economy bends Australia’s will buckle. 

Australia’s biggest export is iron ore and frequently the country’s main driver of a trade surplus and GDP growth with 81% of its iron ore exports going to China. However, demand for iron ore in China is falling because 50% of it comes from property development which in 2017 is under stress as prices level off and credit dries up. Critically, the price of iron ore has fallen 60% over the last 6 years. 

 

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