THERE ARE two ways to film the banana-skin joke, said Charlie Chaplin. The first begins with a wide shot of a man walking down Fifth Avenue. Cut to the banana skin on the pavement. Go to a close-up as foot meets peel. Then pan out to reveal the man landing on his backside. Ha ha ha. The second version is like the first except in this one the man spots the banana skin and carefully sidesteps it. Blind to other hazards, he smiles to the camera—and immediately falls down an open manhole.
The second version is funnier, perhaps because it carries a deeper truth: a mishap avoided can lead to a greater calamity down the road. This seems to be a pattern in financial affairs. Japan dodged the banana skin of America’s 1987 stockmarket crash, only to disappear down a manhole a few years later. Emerging Asia brushed aside the Mexican crisis but imploded later on. Britain sailed through the dotcom bust in the early noughties, but was damaged by the subprime crisis.
This is why some analysts believe that Australia’s economy is overdue a fall. It shrugged off the global financial crisis (the GFC as Australians call it) of 2007-09. Indeed it has dodged recession for 27 years, making fools of forecasters. But it has paid a price. By extending its business cycle, it has over-extended its financial cycle. That in turn makes it more vulnerable when trouble strikes.
To understand why, first consider how exceptional Australia has been. Its economic cycle was broadly in sync with America’s until 2001. America slipped into recession. But in Australia a sharp reduction in interest rates by the central bank lit a fire under the housing market. The saving rate declined as consumer spending rose. GDP growth sped up even as it fell in America.
When the GFC struck, Australia’s banks came through intact. Policymakers boasted that the steady profits from oligopoly (Australia’s “big four” accounted for 70% of banking assets) meant local banks could eschew the sort of risky lending that crippled those in America and Europe. A credit boom in China spurred a mining boom in Australia. When it ended in 2014, interest rates were cut and housing took off again.
Australia has not been left unmarked by these escapes. Its housing market is now one of the most overvalued in The Economist’s global house-price index. Household debt has reached 200% of disposable income (the comparable peak in America was 125% in 2007). The saving rate is skimpy. Ian Harnett of Absolute Strategy Research, a London-based consultancy, points out that wherever the value of the banking sector has risen above 20% of the overall equity market, trouble has been close behind (see chart). Others think Australia is due a “Minsky moment”, named after Hyman Minsky, a scholar of financial cycles, in which a debt mountain collapses under its own weight.
House prices have been falling for a year, led by the markets in the big cities, Sydney and Melbourne, popular spots for global investors, notably from China. A clampdown on risky lending by bank regulators acted as a trigger. It seems Australia’s banks may not have been quite as conservative as previously advertised. The share of interest-only loans, favoured by speculators, was as high as 40% (it has since fallen).
The wider damage has so far been limited. The number of permits issued for apartment buildings has fallen, but a full pipeline of projects means that construction firms are still busy. Consumers have kept spending. The Australian dollar fell by 10% against the American dollar in 2018, but its current level is not out of the ordinary.
Still, the situation looks fragile. Doubts about the durability of consumer spending have kept the Reserve Bank of Australia from raising interest rates, from their current 1.5%. A heap of mortgage debt seems wise when house prices are rising; less so when prices fall, especially for those who bought at the peak. The momentum that drove the market up, as higher prices fuelled expectations of further gains, works in reverse too.
Efforts to stabilise an economy often lead to booms in asset prices and credit, which in turn leaves it vulnerable come the next spot of trouble. The lucky country has avoided so many potential slip-ups that even long-standing bears are wary of predicting a fall. Perhaps a new round of fiscal stimulus in China will lift Australia’s fortunes. But for many people’s tastes, China is an even better example of a tragic principle. The more banana skins you dodge, the bigger the manhole waiting for you.