Is Australia at Risk of a Collapse?
Debt to GDP is a key ratio.
Does Australia have a ‘zombie economy’ that is at risk of a crash?
Updated
We are complacent, we are blind and we are ignoring the lessons of history at our peril.
These are the warnings of some doomsday economists who fear we are heading towards the same financial cliff that hurled the world into a crisis from which we are still emerging.
Very few experts saw the global financial collapse coming less than a decade ago. Some of those who did are warning that we stand again on the same precipice.
They say the countries that are most at risk are the ones who dodged the bullet in 2008: among them China, South Korea, Canada and Australia.
We are trapped in the crosshairs and it all comes down to debt.
Steve Keen is head of economics, politics and history at the UK’s Kingston University, writing last year in The Conversation he said “mainstream economists need to get their heads out of the sand”.
His focus is personal debt: how much credit we as householders are taking on and what happens when we can’t pay it back.
Professor Keen says when too much credit is generated by banks debt piles up against the wealth generated by economic growth: debt to GDP (gross domestic product) balloons and that makes countries vulnerable.
The Great Depression of the 1930s, he says, was triggered by a debt fuelled US stock market bubble; in 2008 it was debt again that sparked the crisis this time mortgages.
Look to China, he warns, “whose credit bubble is easily the fastest growing in the history of capitalism”. Indian economist Amit Kapoor sees history repeating, saying: “China is on a path eerily similar to the pre-crisis US.”
The key is how much debt is required to generate economic growth, Mr Kapoor says when the last crisis hit the US needed up to $5 of debt to generate $1 of growth: China, he pointed out, now requires up to $8 of debt for a dollar of growth.
Should Australia be worried?
The alarm bells have been ringing for years.
In 2016 The Economist magazine warned that China’s total debt to GDP ratio had risen from 150 per cent to 260 per cent in a decade, “the kind of surge that is usually followed by a financial bust or an abrupt slowdown”.
When the global financial crisis (GFC) hit, China turned on the taps to prop up growth, The Economist said “it was wrong not to turn them off again”.
Australia did the same: government stimulus and China’s hunger for Australian resources staved off the worst of the recession.
But Professor Keen calls Australia a “zombie economy”, sleepwalking to crisis.
He points to our level of household debt about 200 per cent of GDP, Professor Keen says “you can’t avoid a debt crisis today only by putting off till later”.
After the stock market collapse earlier this month, former federal government economics adviser John Adams, said we were staring at a coming “apocalypse”.
Debt and record low interest rates, he warned makes us vulnerable and Australians “should be concerned about what lies ahead”.
Mr Adams cautions us to reduce personal spending, increase savings and pay down debt.
Reserve Bank governor Philip Lowe has cautioned that household debt should not exceed income growth: that comes at a time when wage growth is sluggish.
The International Monetary Fund has also warned about the worrying levels of household debt and its potential impact on economic stability.
On the up side…
Is it all gloom? Not really. The IMF is forecasting an uptick in global economic growth to just under 4 per cent this year stimulated by company tax cuts in the United States.
How long the sugar hit lasts, is another question.
China’s economic power isn’t as big as you think
And while concern persists about China, its economy is still growing strongly — albeit down from the double-digit growth of the past two decades.
Ann Lee in her book Will China’s Economy Collapse? reminds us that while many in the West have concerns about the health of China’s financial system and how reliable are its growth figures, Lee says China’s “broad economic health actually appears rather stable”.
She says China has high personal savings rates and low external debt; China’s banks have a low number of non-performing loans.
The Chinese Communist Party has been adept at identifying and reacting to crises — learning from the problems of the West.
But The Economist fears now “the government is not so much guiding events as struggling to keep up with them”.
Amid the gloom we may take some solace from the fact that those who see potential disaster have been warning of the next crisis ever since the last one.
Matter of Fact with Stan Grant is on the ABC News Channel at 9pm, Monday to Thursday.