There are many countries who despite looking prosperous on the surface face huge risks to their economy. One of those is Australia who some experts fear may face a huge economic slump if global events go against it. The problem is once again that of debt, in a variety of forms – Australia has huge household debt, a record level of foreign debt and the potential risks of a massive housing bubble which has developed over the last ten years.
We live in a turbulent times for the global economy and it doesn’t take much to tip debt laden economies over the edge. In modern times consumers are much more used to higher levels of consumer debt yet these levels are now at record highs, only the depression of the 1920s has there been the same figures. In the short term this might be sustainable as long as the economy is growing sufficiently, some statistics report that Australia’s level of household debt as a proportion of household income stands at an average of 187%.
Anyone can see that this level puts the economy in a perilous position, any shocks can send families in a spiral of debt and repayment problems dragging the Australian economy with it. High levels of sustained household debt rarely end well, and in fact they mirror all of the biggest Australian economic depressions of the last century.
It’s not just consumers who are drowning in debt either, Australia’s net foreign debt has been rising too and now stands at a record level of over 63% of Gross Domestic Product – the levels are eye watering for a relatively small economy at over $1 trillion. Again this is probably sustainable in the short term but any global events, a government crisis or banking issue would make Australia extremely vulnerable.
Much of this is a direct result of Government fiscal policy with a huge amount of credit being expanded in all sectors of the society. The housing bubble has been a consequence of this expansion of credit with housing credit now at a level of 95% of Australia’s GDP compared with about 20% in 1991.
Other levels of credit such as that directed towards business investment has not risen to such a level and has been fairly static. Many Australians look across at Europe and North America and feel that they are far removed from any financial risks yet that is simply not the case. You can sit and watch the BBC in Australia of course using a VPN yet in many ways these economies have some of these same risks yet on a lower level simply because of the size of their economies.
The levels of debt ranging from consumer to government represent a huge problem to the Australian economy however it seems that there is little political motivation to correct them. Bringing down debt and raising taxes is never a popular move but sometimes it’s a prudent one!.
We can see that many political events across the world are heavily influenced by economic links. Ukraine seeks greater ties with Europe but is heavily reliant on Russian gas as an energy sources. Russia seeks to flex it’s muscles internationally but is hampered by the fact that it’s economy is almost wholly reliant on selling raw materials like gas to European countries. Stock markets and currencies tumble when political events cause instability in these relationships.
Of course some of these links bring economic prosperity to a nation too, take the almost symbiotic link that Australia has with China. The huge growth in China has required a huge amount of raw materials to satisfy it, as the smog clouds over Beijing testify too. A lot of these materials come from the nearby resource rich Australia, which has even been dubbed ‘China’s mining pit’.
It’s hard to find an economy anywhere in the world that is so dependent on another, China buys 31% of Australian output. This is usually incredibly beneficial except that it makes the Australian economy very reliant on how China fares economically. So last week when a few weak statistics suggested that China’s growth was stalling – Australia got to share the pain.
Many investors already buy Australian stock as a means to leverage the Chinese market. It’s much safer to invest in stocks and shares in Australian as opposed to the state controlled stock exchange in China. Chinese restrictive practices have already started to impact it’s growth especially those on digital communication. Many firms try to avoid setting up headquarters or offices in China due to the heavily filtered internet access. Companies and individuals are forced to invest in a fast proxy simply to make their usual infrastructure work in that environment – for many it’s simply not worth the effort choosing to settle nearby in places like Singapore which is not regulated as dramatically.
There is probably little that Australia can do in the short term about it’s reliance on Chinese success. The worry that the Chinese economy is looking very fragile at the moment is a very real one however. It’s currency is overvalued, there are little sign of productivity gains or the vital structural reforms many hoped for. Inflation is rising and there is a growing outflow of capital to investment markets abroad. Australia has little options though to continue to trade heavily with China whilst seeking to develop other trading partners to try and reduce their exposure.
For more information on this subject see this video explanation of how to access Australian media sites.
The world is changing and with Europe in disarray, it’s interesting to see where the UK’s main exports markets are. Make no mistake, Europe is biggest export market for the UK without doubt. But the latest figures show some interesting developments on where the global economy is moving!
There’s a change coming and this graphic illustrates it perfectly – look at the biggest growth areas. India and surprisingly Russia are looking as though they will become very important markets for the British economy. Our biggest trading partners the Americans are showing very slow growth. It looks like in a few years the biggest export markets for Britain are going to be completely different.
IT’s one of the problems I have with the European Union, the world is not that small anymore. Of course it’s great to liberalise trade and reduce barriers in the European Union but the rest of the world is on the whole doing much better than Europe. Look at the top products we sell, the biggest ones like metals, minerals and nuclear reactors are exactly the sort of products that the fast growing developing countries will need. Your not going to sell many nuclear products in Europe where many countries are replaing with alternative energy sources.
There are also developing areas within the UK economy that are not listed on this picture, for one the rise of businesses based on the internet. It can be surprisingly difficult to deal with trade partners situated in different areas. I tried to do business with a company in Australia, but was unable to access many of the corporate and banking sites I needed to. Fortunately someone pointed me in the directions of some instructions which explained that I needed an Australian proxy server to access them. Here’s a useful article about Smart DNS and methods for accessing sites that are restricted by location – http://www.theninjaproxy.org/ninja/change-ip-address-region-free-smart-dns/
These are the sort of barriers that damage trade though, often the result of commercial protectionism that seek only to defend profits of a single company at the expense of an entire economy.