Swan denying that Australia’s economy is at risk of a Spain-like economic crisis, calling the thesis put forth by the former chief Asia-Pacific economist for Morgan Stanley, Andy Xie “absurd”.
It’s absurd - the Australian economy and its economic fundamentals are very strong. On a yearly basis we are growing at 4 percent – we are going to grow faster than any other developed economy this year and next,” Swan told CNBC's " Capital Connection" on Wednesday.
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Xie, an independent economist with sometimes controversial views, argues that Australia is at danger of becoming the next Spain due to its reliance on foreign demand, especially from its biggest trading partner China, which he believes is decelerating faster than headline growth numbers suggest.
Australia’s economy is heavily reliant on the mining sector, which accounts for 7 percent of gross domestic product (GDP) and half of the country’s total export earnings.
“In Spain it was government bonds that attracted foreign money. Foreigners flooded Spanish bonds because they had high interest rates and were very attractive. That foreign money pumped up a property bubble,” Xie told CNBC Asia's " Cash Flow".
In the case of Australia, investors have been rushing to invest in the mining sector. Xie believes the bursting of Australia’s mining boom could unwind that flow of money with disastrous consequences.
To top it off, house prices in some Australian cities have grown close to 10 percent annually in the past decade, leading to a wave of borrowing against home valuations. Household debt in the country has been around 150 percent of disposable income since 2006.
As China’s demand for resources declines, Xie says that could have a knock-on effect on the property market.
“As global commodity prices come down, mining will decline and the property bubble will burst,” he said, adding that a property crash will take down the county’s banking system as well. |
