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Australia’s record trade deficit – Recessionary conditions looming

Posted by Adrian on April 8, 2008

The Australian terms of trade reported a massive trade deficit of $3.29 billion from $2.54 billion in January 2008; this would indicate a few things. Weather and infrastructure problems and the main issue is global trade slowing rapidly as reported in World Crisis scenarios for the 21st century – World economic depression (update 13).

Australia has had an expansion economy, much like countries that relied on housing and housing related development for the economy. The countries (Europe) that show similar signs are of course Spain and Ireland. Politicians in Australia have been quick to reassure the populous that credit market turmoil and global recessionary conditions will not effect Australia; and there will be a moderate slowing down. Even Glenn Stephens the RBA governor, claimed Australia will not be effected by a global slowdown, or recession. This is of course a fallacy, the huge trade deficit is one indicator of a country running full steam on credit, very vulnerable to the global credit market turmoil.

Australia’s housing market is speculative driven and now at a tipping point of collapse, interesting example of the precarious position of the Australian mortgage market is the Reserve Bank of Australia (RBA) have been increasing interest rates rapidly in 2008, one in February 5th and the other March 4th, bring the cash rate to 7.25%. At the same time the banks of Australia have been increasing their lending rates timed with the RBA rate decisions. The Australian banks are very connected to global money markets, hence the increases in their rates over a short period of time.

The banking sector has collapsed as far as stocks, dragging down the All Ords close to -20% (March 17th), just shy of becoming a bear market. The weight of the mining sector the only savior, and that now appears to be waining. The market looks upon the Australian banks as vulnerable to money market condition’s, and hence has cut their share prices down.

All Ords comapred to Dow – the All Ords has dropped lower than the Dow Jones

Major Australian bank ANZ is allowing almost 1 billion (A$) to set aside for provisions for bad debts. After a slew of major property trusts have gone bust, and two major stockbrokers that participated in margin lending also went bust.

The Australia consumer who is still facing high inflation on food and oil, will also pay for the corporate gamblers that have lost big through property trusts and margin stock brokering firms. So, interest rates from the banks will continue, contraction with lending will be wide spread; this will in turn effect the housing market, that is extraordinary overvalued – with both the mortgage and rental market sucking 30% – 40% of household income.

Now with a trade deficit as high as it is and also high inflation – the RBA will sit it out with the tightening cycle, with the banks contracting and the corporate sector de-leveraging, recessionary conditions in Australia will develop very quickly into 2008.


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