australia

Can Australia withstand another global financial crisis?

When the typhoon of the global financial crisis surged around the world in 2008, most countries took a severe beating. Many came close to sinking. But as the United States and Europe floundered, Australia battened down the hatches and weathered the storm. In fact, life seemed pretty good: Employment was high and there was a healthy trade surplus. But as economic storm clouds gather again, we ask, “Could Australia do it again?”

The question is valid. After all, the Bank for International Settlements has said there are no lifeboats left for the next economic crisis.

One of the major factors that kept Australia afloat in 2008-09 was the fact that the country was roped snugly to China. Australia’s mining boom came at the perfect time. China was consuming any raw materials Australia could sell. Following that was the related housing market boom. And so it was that Australia sailed out the other side of the global economic storm, right alongside China. But what about this next time?

SURFING THE COMMODITY WAVE: With a bountiful supply of iron ore, gold and other raw commodities, Australia has been riding the commodity wave quite seamlessly while other nations—lacking these natural resources—have been becalmed at best.

But the wave has died down, leaving Australia in a dire position. As Prime Minister Tony Abbot stated, “We are at risk of succumbing to the European disease; we are at risk of becoming a second-rate nation living on its luck.”

With global commodity prices expected to fall by 10 percent this year, Australia is starting to realize just how bad its predicament is. In fact, it will be one of the first nations majorly affected by the commodity collapse. Nations such as Saudi Arabia and the other Gulf states are also massive commodity nations, but these super-rich nations are backed by a cash surplus they can dig into when times get tough. In effect, when the commodity wave stops, they have something to keep paddling with—Australia doesn’t.

If commodities keep falling, Australia will be in dire straits.

Gina Rinehart, Australia’s richest woman, heads up Perth’s Hancock mining company. Her family wealth comes from the boom in iron ore mining. But since prices went into a tailspin, her estimated wealth dropped from $30 billion to $11 billion—in just three years. Australia is just as dependent on commodities as Rinehart.

WEAK INVESTMENT: Today, with mining in the doldrums, one of the only areas of high investment left is the property market. Anyone looking to buy a home, particularly in one of the major cities, knows that prices have skyrocketed. In Sydney the average house price wasAUD$750,000 (approximately US$550,000) last September—almost a 15 percent increase on the year before and still rising.

But the astronomically expensive housing market—even if it was sustainable—can’t hold up Australia alone. According to Sydney Morning Herald, “Other areas of corporate spending range from just OK to dangerously weak.”

FOREIGN DEBT: Another problem then emerges. With the government borrowing a record $1 billion per month to finance operations, Australia could quickly become slave to the lenders. The Australian senate has been unwilling to pass Abbott’s budget cuts, meaning the borrowing may be set to rise to $3 billion per month.

This could set Australia up as the next crisis point. Just as Greece has had to turn to the European Union as a last resort, so too could Australia turn to China as its banker. Some may laugh and say Australia would never find itself begging at China’s front porch, but don’t forget, Australia’s net foreign debt is already at a record $955 billion—almost 60 percent of gross domestic product. If the housing market wipes out, it will quickly push the debt even further below the water.