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Australia’ economy sitting on a bubble

business Updated: Aug 19, 2013 21:56 IST

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Australia may boast of having been one of the few developed economies to emerge from the global recession largely unscathed and still retains a AAA credit rating. But the country now risks the collapse of the sort that has become all too familiar on English cricket grounds this summer.

In the days before the financial crisis, developed countries like Australia did nicely out of a global economy in which manufacturers like China grew at 10% a year and the US was acting as the spender of last resort. Global growth averaged around 5% a year — something that is an aberration now.

Australia’s natural-resource exports account for 60% of the total. While the mining sector has growth by 7.5% over the past decade, the rest of the Australian economy has expanded by around 2.5%.

Australia now bears all the hallmarks of a country where its industrial base has hollowed out. Ford Australia recently closed two of its manufacturing plants due to natural resource boom driving up the exchange rate, making all other exports deeply uncompetitive.

With the outlook for the global economy far less rosy than it was, the mining sector is also cutting back on investment. The only remaining source of growth is an overvalued real estate market that may already be in bubble territory.

The Reserve Bank of Australia is now cutting interest rates and talking down the currency in an attempt to rebalance the economy. That is easier said than done when your economy amounts to a large hole in the ground ringed by some expensive property.