Australia's Luck Has Run Out Gaudy numbers mask serious flaws in the country's economic model.
By Satyajit Das
October 4, 2017
..a debt bomb is growing Down Under. Australia’s total non-financial debt is over 250 percent of GDP, up around 50 percent since 2010. Household debt is currently over 120 percent of GDP, among the highest proportions in the world. The ratio of household debt to income has nearly quintupled since the 1980s, reaching an all-time high of 194 percent.
Stagnant real incomes have contributed to the problem, as have high home prices and the associated mortgage debt. Despite record-low interest rates, around 12 percent of income is now devoted to servicing all this debt. That’s a third more than in 1989-90, when interest rates neared 20 percent..
..The high debt levels increase the risk of a banking crisis, which could be sparked by rising losses on real estate loans. Australia’s especially vulnerable because of its dependence on foreign capital; foreign net debt tops 50 percent of GDP, much of it borrowed by banks to cover the shortfall between loans and domestic deposits.
High debt levels also limit the government’s policy flexibility. Lower interest rates have proven ineffective in stimulating the economy, as over-indebted consumers are reluctant to spend more. At the same time, easy money has inflated the prices of homes and some financial assets, benefiting the rich and exacerbating inequality.
The central bank has to be wary of normalizing rates, given the impact higher rates could have on house prices and on financially stressed borrowers. Engineering a reduction in the value of the currency could affect the ability of Australia to borrow internationally and reduce demand for Aussie-denominated securities. Devaluation would also potentially increase inflation, putting pressure on interest rates..
..In fact, if it wants to remain a “Lucky Country,” Australia will have to change significantly -- and quickly.
