The Winds of Change for the Australian Economy

Right now, we have a distant but comfortable view of the global debt crisis. It affects the stock market and your retirement savings. Apart from that there is no discernible impact. But if you look closely there is a lot to discern.

In an interconnected, globalised world, trouble in one place quickly spreads elsewhere. A slowdown in Europe (and the US) hurts China just as it tries to deal with a burst credit bubble. That in turn hurts the Australian economy. But it’s not just via trade links that we feel the impact of a northern hemisphere economic chill.

The flow of capital also dries up. This keeps interest rates elevated, no matter what the RBA does. It also wakes people up to the double-edged sword of debt. And that hurts Australia’s property market – that supposed bastion of indestructible wealth. As our mate Kris Sayce over at Money Morning has been saying for years, Aussie property prices are way overvalued.

In a somewhat alarming occurrence, Gail Kelly, Westpac’s chief, came out in support of Mr Sayce yesterday. Well not exactly. We’re sure she’s not the type to read anything as provocative as Money Morning. But she did say that the years of compound growth for house prices were over…for good.

That’s hardly a revelation to long time readers. But when a bank boss comes out and says it you know the boom is well and truly dead. It points to the psychological change that takes place as boom turns to bust. At first, only the ‘crazies’ talk about it. Then the business leaders accept it as reality…in preparation to explain why profit growth remains elusive. Then people wake up to themselves and wonder why they paid $1 million dollars for an inner city (depreciating) shack.

The psychology of Europe is certainly in the bust phase. For the Australian economy, the smell of prosperity is still in the air. But the winds are beginning to change…


Greg Canavan
for Markets and Money

From the Archives…

The Avalanche and the Phase Transition of the Financial System
2012-06-08 – Greg Canavan

A Financial Crisis that Repels Private Capital
2012-06-07 – Eric Fry

Floating Towards Japan’s Economy on a Sea of Bad Debt
2012-06-06 – Bill Bonner

Pirate Politics to Save the European Union
2012-06-05 – Nick Hubble

China’s Economy… Where All is Not As It Seems
2012-06-04 – Greg Canavan

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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3 Comments on "The Winds of Change for the Australian Economy"

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I would say the winds have already changed, BIG TIME. It’s like we’ve all woken up to a really cold and miserable day but we have all been told the night before to expect warmth and sunshine…but it’s still freezing cold, wet and bleak.
We are in a ‘denial phase’ at the moment. The ‘numbers’ say one thing but we all know the numbers are not to be trusted and are indeed false.

We’ve been told rubbish for too long, we have to accept we are in for some really, really bad times, make no mistake.

There is no escaping it!

Ned S

You might be in for bad times “Babe”? – Me, I’ve got houses, cash, a job and a ‘Svetlana’ … :)

Ned S

Oh, and a car and NO stocks thank Christ!

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