Can Australia’s resource boom end sooner than expected?

April 9th, 2008

Share |

Our long time readers will be very familiar with our frequent warnings not to take Australia’s resource boom for granted. Today, we will repeat this warning again, albeit briefly.

Back in September last year, in this news article, Post-Olympics hangover may be risky business, it said

A LEADING global manufacturing expert has warned that China could be heading for a post-Olympics hangover with the potential to disrupt the resources boom on which Australia depends.

In particular, domestic consumption in China still accounts for a relatively small 39 per cent of the economy, with the remaining 61 per cent soaked up by infrastructure investment and net exports.

“Over time, this will shift and domestic consumption is going to become a bigger and bigger piece of the economy,” Mr Gromley told BusinessDay. “But, while that transition happens, there is a risk that over-investment in infrastructure will cause a bubble effect, particularly after the Beijing Olympics.”

What Mr Gromley calls over-investment is what we call mal-investment (see our guide, What causes economic booms and busts? for the concept of mal-investments).

In January this year, we wrote about our scepticism about the Chinese de-coupling theory at Can China really ?de-couple? from a US recession?. If our theory is right, this will have grave implication for Australia’s resource boom. If this boom peters out, Australia, with such high debt levels, will fall into severe recession (if not already in recession) led by debt deflation. When that day comes, a lot of ‘rich’ people will suddenly find the value of their asset worth far less than their expectation (see Aussie household debt not as bad as it seems?).

Tags: , , ,