The Chinese Connection

Optimism about the Australian economic outlook is premised on the idea that Chinese demand for resource exports will carry Australia through. I do not believe that the resources sector is really capable of keeping the Aus economy afloat, and that what is really keeping it afloat is precisely the myth of its own robustness. But in any case, it seems dubious to think that the Chinese demand will last forever. To wit, a couple of pieces by Bloomberg correspondent William Pesek. Firstly, this general piece, warning about the stability of the Chinese economy. Secondly, a more specific warning directed at Australia.

Finally?

The Australian economy has kept rumbling forward for the last couple of years like a headless chicken. "Look how it runs around! It's not dead!" But, sooner or later, chickens must come home to rot. The key point of vulnerability and volubility in the Australian economy is the house price bubble. This is now deflating everywhere but Sydney. In conjunction, the economy has just nosedived into recession (though not by the strict definition by which only several quarters of recession is counted as recession). The blame for the latter is being placed on the weather, much as it was in the UK earlier this year. But you put these two things together and one may see the crucial puncture. Of course, given a global situation in which capital has nowhere to go, and with Australian interest rates still so high, mass capital flight is not upon us yet. But we may finally see the adjustment to house prices and dollar that we've been waiting for.

Update The chicken is teetering, woohoo.