Australia made the decision to hitch onto China years ago and so far, the ride has been mostly good. As the economy in China expanded, so did the economy in Australia. Raw materials helped feed the demand in China and the money kept rolling in.
The downside to this approach is that China has its own bubble and when that slows, so does Australia. Then you have a credit issue that is tied to the heavy commodity trading with China. Add to this the problem of overvalued housing and you have what many believe is a painful bubble on the verge of bursting.
It was a good ride, but all bubbles eventually pop. More on the future of the Australian economy via CNBC:
Australia is headed for the “mother of all hard landings,” according to Société Générale strategist Albert Edwards, who says the country’s “credit bubble” could burst if China’s economy suffers a sharp slowdown.
“(In Australia) We see a credit bubble built on a commodity bull market based on a much bigger Chinese credit bubble,” Edwards said in a report. “Of all the bubbles I have seen over the last 30 years in this industry, this one is even more obvious.”
Edwards reiterated his case for a hard landing for the mainland economy, pointing to the official Purchasing Mangers Index (PMI) of 53.3 last month, which he says is “the worst” April reading in years.