Australia: a bubble built on a bubble

Australia has been dubbed ‘the lucky country’: it last had a recession in the early 1990s. The Chinese-state-mandated lending spree helped it ride out the global financial crisis. Australia supplies China with many of its raw materials, with around 25% of its overall exports going to the country. But now that China is slowing, Australian growth is slowing sharply – it rose by just 0.5% in the first quarter – and it’s hard to see what could replace the Chinese boost.

The strong Australian dollar has squeezed the manufacturing sector while the good times blew up a housing and credit bubble. Household debt as a proportion of disposable income has soared to around 150% and in Sydney and Melbourne house prices have exceeded eight times the median income.

Australia looks like “a credit bubble built on a commodity bull market based on a much bigger Chinese credit bubble”, says Albert Edwards of Société Générale, a bank. Credit-ratings agency Fitch estimated last week that overall credit in China rose from 75% of GDP to 200% in the past five years, an unprecedented increase in a large economy. With firms already spending 30% of GDP on debt, says Ambrose Evans-Pritchard in The Daily Telegraph, it may not be long before China’s debt “collapses under its own weight”.