Saturday, August 25, 2012

Reasons (Not) to be Cheerful?

While I've been keen in recent months to accentuate the positives about the current performance of the Australian economy, I've been hedging my bets on the future of the Australian economy.

It shouldn't be in dispute that we've done well over the last 21 years and particularly since the global financial crisis.

One of the major factors in our success has been the continuing growth of the Chinese economy since the GFC, spurred by massive policy stimulus.

There are lots of people who have been warning of an end to the high growth rates in the Chinese economy for quite a few years now and I have written extensively about them over the same period. (here and here and here for example).

Increasingly, the view is that the Chinese authorities have been systematically understating the extent of the slowdown.

A recent report by the New York Times argued
The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.
The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.
Corporate hiring has slowed, and jobs are becoming less plentiful. Chinese exports, a mainstay of the economy for the last three decades, have almost stopped growing. Imports have also stalled, particularly for raw materials like iron ore for steel making, as industrialists have lost confidence that they will be able to sell if they keep factories running. Real estate prices have slid, although there have been hints that they might have bottomed out in July, and money has been leaving the country through legal and illegal channels.

As I've been arguing for quite some time, falls in iron ore exports will hit Australia particularly hard.

Although I would never offer anyone investment advice, I've shifted my super completely out of equities because I think things are about to turn down over the next 6-12 months, perhaps sooner.

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