Australia’s Booming Economy Must Be Cautious

03 July 2012 02:00 - Phoebe Robinson

Australian’s Booming Economy Must Be Cautious

There are worries over the dependency of the Australian economy on the Chinese economy. Forecasters have said that the central bank is likely to have to cut rates harshly in order to protect the resource-rich nation from having an economic slowdown similar to those in Europe such as Spain and Italy whose disastrous economic situation is having a backlash on the global economies. 

Australia has been warned that foreign investment which seems to mainly focus on large mining and energy projects will fall from its current position of just under  half of GDP. It is thought that it is this that will trigger a downturn in the Australian property market that could have the potential to see house prices drop by 30% which is worrying.

This negative analysis for the Australian economy goes against the views of economists and the IMF, who have praised the country for its success at reducing debt and holding onto growth rates higher than all of its economic rivals.
The Australian economy is growing at 4.3% based on the most recent data, but this healthy figure only exists due to China’s demand for the country’s raw materials and resources.

This dependence on China is what is said to be the danger for Australia. The Chinese are Australia’s main trading partner now and the driving force behind this relationship is the mining industry is responsible for 7% of GDP. A slowdown in the Chinese economy is now being said is what is going to bring Australia‘s mining boom to a halt.

Chinese banks look to be struggling, finding it hard to lend money in order to fund new projects.  Mr Xie who was the chief economist for Morgan Stanley in Asia has pointed out that “when a bubble is funded by foreigners that are when we know when it’s going to end. The tipping point is once large projects start to be postponed.”

It is worrying as prospects for the mining industry are already look to slip as mining giants like BHB Billon have already eased back on $80 billion on new projects by 2015. Also the Switzerland-base Xstrata has shut three Australian mines last year. Forecasters are also predicting that Rio Tinto may too be forced to shelve some of its local coal projects.

So in order to prevent this causing problems for the Australian economy which so far has manged to keep its head above the water as the rest of the world drowns in an economic downturn; the RBA will be force to cut interest rates which has the potential to cause the AUD to fall against the USD by 30%.