Australia’s economy has been flying high for more than a decade on the back of soaring commodity prices. But now “the party may be coming to an end”, said Canada’s Financial Post. This week the Australian financial sector slumped as National Australia Bank said it would write down A$830m (£395m) of its investments in US residential mortgages, noting that the subprime crisis has moved to other classes of mortgages.
Australia & New Zealand Banking Group announced A$1.2bn (£572m) of second-half provisions, due to deteriorating global credit markets, a slowdown in New Zealand and a softening Australian economy. According to UBS, ANZ is the first bank to highlight deterorating underlying trends, such as an uptick in 60-day arrears for Australian home loans and credit cards.
Banks face more bad debts
And there is plenty of scope for further trouble. While the commodities boom now seems to be abating as global growth slows, consumers look vulnerable, said Lex in the FT. House prices, with an average price/income ratio of 5.5, are overvalued, while household debt stands at 177% of income, higher than Britain and America. The central bank has raised interest rates by 1% over the past year and, as Laura Santini pointed out in The Wall Street Journal, Australian banks rely heavily on foreign bond investors for funding.
Now that the global crunch has made this more difficult, banks have had to raise rates more quickly. No wonder, then, that the central bank has noted that credit expansion to both households and businesses has “weakened significantly”, while consumer and business confidence are at 16 and ten-year lows respectively.
More bad loans as the economy deteriorates portend a further lending squeeze and slower growth. The country, as one analyst put it, “is running out of positives”. Those “keen to take a punt on Australia”, said Lex, “should stick to rugby.”