I promised you that I would update you on Australia in greater detail given my prediction that the Australian housing bubble would pop. Last week we carried two posts on the bubble (see here and here). It is clear that Australia will be caught up in the global growth slowdown and that the collapsed credit growth from the deflating housing bubble in Australia is a harbinger of reduced economic growth. I wrote last:
Question: how long will the government compensate with deficit spending? If Australia turns to austerity, you don’t even need to know your financial sector balances to realise Australia would be a serious risk-off bet. This day is coming soon.
Indeed it is because Australian Prime Minister Julia Gillard clearly doesn’t understand any of this. Nor does understand the financial sector balances because she is about to make a policy mistake which could tip her economy into recession.
What am I talking about? This Bloomberg interview below.
Australian Prime Minister Julia Gillard says that returning the budget to a surplus of AUD$1.55 billion would give the central bank "maximum room" to move on interest rates because the strong Australian dollar is hobbling manufacturing and tourism. She wants Australia to take on austerity and cut its budget for the first time in 42 years. She plans on tightening fiscal policy by 3% over 4 months. That’s a huge tightening. In essence, she wants to suck money out of the economy, move to fiscal retrenchment just as housing and credit growth are creating an economic headwind. What do expect to happen?
Now to be fair, she says she anticipates 3.5% growth in Australia this year, making it the right time to have a surplus. However, I expect this growth rate will turn out to be optimistic. Investment advisor Andrew Pease thinks the government’s numbers are not credible.
With cuts coming just as the housing bubble is deflating and China is experiencing its own slowdown, expect Australian growth to slow rapidly.