Australia – A Trillion Reasons to Worry

As we covered in today’s Weekly Wrap Podcast, the rejoicing of Australia’s better than expected GDP this week needs to be looked at in the broader context.  As usual Greg Canavan of The Daily Reckoning explains it so well.  Our promise is to keep our news short so we will summarise below but endeavour to get Greg’s article up for your reading over the weekend.  So in summary:

• Headline GDP growth 1.1% March qtr, 3.1% year on year.
• 1.2% of that growth came from increased net exports.  Most of that was on higher ore, coal and natural gas volumes.  But that volume is on lower prices.  Our terms of trade fell 1.9% for the qtr and 11.5% for the year (!).
• Accordingly Real Net National Disposable Income was barely up at 0.2% and is down 1.3% for the year.
• Despite those big export numbers, we still import more than we export to the tune of $8 billion in that same March quarter.
• Our foreign debt is now over $1 trillion.  Just 5 years ago it was ‘only’ $636 billion.  That is a 62% increase!  The interest bill on that debt for the last quarter was about $8 billion.
• Our debt to GDP ratio now stands at 243%.  Yep, nearly 2.5 times more debt than Gross Domestic Output and growing, not shrinking.
• Adding the net interest bill and the trade deficit and you get the current account deficit.  For the year to end March 16 that was $84.7 billion.  As Greg says “That’s $84.7 billion dollars flowing out of this country to maintain a standard of living we can’t actually afford”
• And so you get a little insight into why the RBA is lowering rates (and is very much likely to do so again soon) when the GDP indicates ‘everything is awesome’.  The fact is we have increased external debt by 62% whilst at the same time national incomes are almost stagnant.  Low interest rates help handle that in the short term.  Over to Greg:
• “But make no mistake; it’s a ticking bomb for Australia. Both household and government debt is growing rapidly, while income growth is stagnant. That means the economy is more and more leveraged, and ever more susceptible to an external shock.

When that day comes — and it always does — the real shock will be felt inside Australia. Most Australians, including our leaders (but not you, dear reader), have no idea just how fragile our economy is.”

Our own takeaway is that this also highlights how different it is this time to the GFC.  We had relatively low overseas exposure when Lehmans collapsed and liquidity was frozen.  All the NIPR and ZIRP fuelled cheap foreign funds combined with Aussies’ rapacious appetite for debt into property (in particular) has seen that very much change.  We now have the highest personal debt in the entire world.  When, not if, we get the next Lehmans event, we are far far more exposed.  And this time we won’t have China to the rescue….  All that might save you is safe haven hard assets.