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!.