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Is Australia Spain waiting to happen?

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by Peter Switzer

I generally find it hard to agree with Treasurer Wayne Swan but he’s absolutely right in slamming a wacko economist who claimed Australia is the next Spain!

Talking on CNBC, Andy Xie, a former chief economist for Morgan Stanley Asia Pacific, thinks there are parallels between Australia and Spain, which Mr Swan dismissed as being “absurd”.

Xie says we are:

over-reliant on foreign demand, especially China;
we are heavily dependent on mining — seven per cent of GDP;
like Spain we have high interest rate bonds that attracted foreign investment;
household debt has been around 150 per cent of disposable income since 2006; and
house prices have grown rapidly in some capital cities averaging 10 per cent per annum for a decade.

All about China

Now Xie, who is controversial, thinks China’s slowdown will be a heavier fall than most expect – this will be the big test of this guy’s credibility. If he’s wrong about China, and I think he is, then it could explain why he is a “former chief economist”.

On the other hand, Australia has a history of boom and bust but we get through it and it leads to a slump in the dollar, which helps a lot of businesses currently being terrorised by China’s success (and the high Aussie dollar it creates).

Wayne Swan looked at our low unemployment, good growth and scope to cut interest rates, as well as our strong fiscal position, but this largely rests on China’s help to keep pumping up our economic growth.

China is the key to Xie’s alarmist story and that’s where he will be brought undone. Also Australia, apart from Melbourne, doesn’t have an oversupply of housing. we have an undersupply, and that’s a big difference with us to Spain.

We’re vulnerable, as all economies are, but we are in a much better position than Spain and our banks are regarded as some of the safest and best rated in the world. And that’s a massive plus and difference, which Andy should not be ignoring.

Wall Street lower

For those who are interested in Wall Street, the Dow was down 118 points at the worst point but ended down only 48.59 points or 0.38 per cent at 12,604.53 while the S&P 500 was 0.02 points in the negative at 1341.45.

The Fed minutes were uneventful but probably implied that while QE3 isn’t around the corner, it’s still on the table.

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Published on: Thursday, July 12, 2012