Crisis Down Under? The doomsayers may finally be right

End of commodities boom and Sydney’s housing bubble make experts think a recession is around corner

The Queen Victoria Building in Sydney, a city where the average house price is 882,000 Australian dollars (€586,000). Photograph: Getty Images

The Queen Victoria Building in Sydney, a city where the average house price is 882,000 Australian dollars (€586,000). Photograph: Getty Images

 

Two years ago, anyone looking at an Australian political or business story online was regularly greeted with a banner advertisement about “the coming Australian economic crash of 2013”.

When 2013 passed without a recession, the date of doom just kept moving forward. Last year the ad from a financial advice website was promising the inside track on why the crash was coming in 2014. And now it’s offering 2015 as Australia’s date with economic destiny.

But could the financial fortune tellers of the internet actually be on the money this time? Are there dark clouds on the horizon for Australia’s almost quarter century of recession-free economic sunshine?

Dr Mark Melatos, senior lecturer at the University of Sydney’s school of economics, says China’s flagging economy is having major repercussions in Australia. “We’re just seeing the start of it. I’m pretty pessimistic. Australia hasn’t had a recession for 25 years and we can thank a lot of that to the commodities boom, which has basically been due to China. And now that’s falling apart, so I would imagine we will end up with a recession sometime in the next couple of years,” he told The Irish Times.

 

Big problems

“It’s not like we’ve banished the business cycle. At some point there has got to be a recession. It’s a question of when. Previous predictions [by others] have been based on when the commodities boom would end; well, it’s ended. I think it’s also pretty clear from the data coming out of China that its economy has some pretty big problems. It’s not just China. Russia’s in trouble, Brazil is in a lot of trouble, Turkey’s in trouble now. A lot of the countries that were creating all this economic activity around the world are falling over at the same time,” said Dr Melatos.

Another crash long predicted for Australia is housing. With Sydney’s average house price at 882,000 Australian dollars (€586,000), and predicted to top 1 million Australian dollars before year’s end, there is little doubt the market is overheating.

“It is a bubble,” said Dr Melatos. “The majority of homes are now being purchased by investors for capital gain and also for tax benefits. If people are buying these properties purely for capital gain because they think they’ll be able to sell them to someone else for more, that tells you it is a bubble. For a long time the reserve bank and policy makers have been trying to avoid this issue, but they are starting to get worried now.”

The reserve bank (Australia’s central bank) governor Glenn Stevens has called Sydney’s house prices “crazy”. He said the steep price rises were “acutely concerning for a host of reasons, many of which are not to do with monetary policy . . . I think it’s a social problem.”

But he warned policy could not be dictated just by what is happening in one city. “Prices in Brisbane are . . . rising, but nothing like that pace,” he said. “There’s not much happening in Adelaide, in Perth they’re probably falling. Canberra, there’s not much happening, [nor] in regional centres across the country.

“So when you’re devising that economic policy for the country, yes, I’m very concerned about Sydney, but we’ve got a national focus as well and that just increases the complexity.”

An economy cannot be separated from politics. They are inextricably linked. Six months ago, after his own party came close to dumping him, prime minister Tony Abbott said: “Good government begins today.” But it didn’t. He and his Liberal-National coalition government have shirked every major economic decision, putting reform into what Australians call “the too-hard basket”.

Raise the goods and services tax (Australia’s version of VAT) from 10 per cent to ensure revenue? Too hard. Stop allowing landlords a tax write-off for the difference between the mortgage they pay and the rent they get? Much too hard.

 

Everyone in the audience

The government has trailed the opposition Labor party in almost all of the past 167 national polls. It only managed to draw level with Labor in a handful last May after a budget that had something for everyone in the audience.

But Dr Melatos says it would not make much difference who was in power. “There was much the same problem with the previous [Labor] government. We are facing the normal political problems that a country faces when it gets to the end of the good years. Every decision that needs to be made is going to hurt someone. For a long time with the commodities boom governments just had oodles of money flowing into the coffers and they could just hand it out and keep everybody happy. That’s come to an end now. I think it would be hard to find any politician who would be able to take the difficult decisions now,” he said.

With the good times looking like they are coming to an end and unemployment trending upwards – though at 6.3 per cent it is still far lower than in most western countries – it is no surprise fewer skilled migrants are coming to Australia and others are returning to their homelands, including Ireland.

Eamon Eastwood, chief executive of Taste Ireland, which imports Irish products to Australia, says sales through supermarkets have been increasing, but online sales – which are more likely to be orders from expats – are static. Mr Eastwood is also involved with Cormac McAnallen GAA club in Sydney. He says club members are going back to Ireland. “There’s definitely been a trickle of people going home. Numbers are slightly down at some of the clubs, so there are some signs of people going back.”

Barry Corr, chief executive of the Irish Australian Chamber of Commerce, says he has not yet seen a drop in the numbers of Irish people coming to Australia. “We are still seeing consistent and steady numbers across white collar professions. The skilled professionals that we’re seeing, the engineers, the lawyers, the accountants, the IT people, are still turning up and we’re seeing increased demand for our services,” he said.

From Australia’s nearest neighbour, though, it’s a different story. For the first time in 30 years the flow of New Zealanders moving to Australia has not just slowed, but many Kiwis are going home. This could be an ominous sign of things to come for Australia.

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