Contagion

From my research there appears to be a recurring theme that could lead to Australia’s downfall and it is an important problem in any financial crises, contagion.

Australia has put all its ‘eggs in China’s basket’ and relies heavily on it for industry and investment. If demand from China falls Australia will greatly feel the effects especially in the resource industries such as mining, however I think maintaining such a close relationship with China has put Australia in a better position than one with say the US or Europe.

There is a high risk of contagion between the property bubble and banking. Housing prices have increased by approximately 300% over the last 10 years, the same increase Ireland saw from 1992 to 2006! The threat of the bubble bursting seems to be looming over Australia and depending if it makes a big bang or if it slowly deflates there will be wide-ranging effects on banking and its economy.

What does this mean for the future of Australia? I think it is essential for Australia’s banks to take the threat of the property bubble seriously, paying close attention to the risks involved and how best to endure the inevitable bursting of the bubble. Australia may suffer a similar outcome to that of Ireland’s housing bubble although I doubt the consequences will be quite as bad. A lot may depend on what is happening in other countries and if it will spread to Australia through panic and lack of confidence by consumers. The RBA however appear not to be panicking, interest rates have been steady at 4.25% during the start of 2012 sending a positive picture of the economy, but this confidence may be misplaced according to many economists who expected interest rates to be reduced. Even with the possibility of a crisis ahead is Australia still a better place to live? Well with an unemployment rate of 5.1% compared to the 14.2% unemployment rate of Ireland, and with 4 of the top 10 most liveable cities in the world according to The Economist…the grass may indeed be greener!