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Australia’s expected growth rate of 3.2% in 2011 may be misleading, because there’s a huge problem waiting to hit the country. Much of this stellar growth has come from its exports to China.12% of Australia’s GDP growth in the last decade came from trade with China, a figure that is expected to reach 35% by 2020, according to Time. Any slowdown in China will likely dim the outlook for Australia’s economy.
In a recent speech, Australian central bank governor Glenn Stevens acknowledged this China threat:
The proverbial pet-shop galah can by now recite the facts on Australia’s trade with China and our terms of trade, which are at a level not seen in over a century. It was already clear by about 2006 that something quite profound was happening in the continuing rapid growth of China, India and other emerging countries.
…Let me be clear here: there is a cyclical dimension to the China story, and it is important that we remember that.
The flow of growth from China is leading to price increases in China. And Stevens believes it’s now time for a tightening cycle to contain these prices rises in Australia.
The underlying rate of inflation is more likely to rise than fall over the next couple of years. This central expectation – subject to all the usual uncertainties inherent in forecasting – suggests, as we said at the time, that ‘further tightening of monetary policy is likely to be required at some point for inflation to remain consistent with the 2–3 per cent medium-term target
More worrying, Australia’s property market is flashing warning signs as well. Large numbers of Australian’s are struggling with their mortgage payments and the ratio of household debt to disposable income in Australia is currently 156%. This compares to 133% in the US, before its property bubble burst. A rate hike from the central bank may make this house payment problem even worse.
The Sydney Morning Herald reported that 1 in 400 mortgage holders had missed one or more mortgage payments at the end of March. In Logan City the 1 in 48 were 30 days behind on their payments as living costs in Australia skyrocket.
If Australia was to hike rates, while China slowed down more, it could cause problems for the country’s housing market.
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