Australian Economy Heading Towards Deflation Say Citi Analysts

CitibankLeading investment bank Citi has stated that Australia's economy is on the verge of a possible collapse but this may necessarily not mean a hard landing.

Led by Paul Brennan, a team of Citi economists has developed a measure called the bubble meter which is used to check the status of the economy. The bubble meter has an indicator Z score that evaluates the levels of mining investment, trade, apartment approvals, bond yields and house prices in the economy. 

Brennan has said that the analysis carried out by his team has pointed to Australia’s economy being surprisingly resilient despite wide-ranging concerns such as record-low commodity prices, rising house prices and household debt.

According to the team’s reports, the bubble meter has indicated deflationary situations twice – once in 2000 and the second time this year. Brennan noted that during the 2008-09 financial currency, the meter had declined but did not indicate deflation.

The current situation according to Brennan is similar to the 2000 situation but with higher exposure to global events. The two factors affecting growth the most are currently mining investment and trade, whereas apartment approvals and house prices are worrisomely high. Data released by the Australian Bureau of Statistics has shown that country’s trade stabilized in the second quarter of the year with exports rising by 1.4 percent due to dropping commodity prices and imports going down by 1 percent.

Housing prices have however soared recently and prices in Sydney are up by 14 percent on a year-on- year basis. Housing prices have gone up by around 9 percent across major cities as per data from CoreLogic while interest rates remain at record lows. According to Brennan, a change in the prevailing deflationary situation depends on a number of factors.

In a statement, Brennan said

The length of time the bubble meter could spend in bust territory will depend largely on how much further mining investment and the terms of trade has to fall and whether the elevated levels of apartment approvals and house prices reverse sharply

Brennan however pointed out that the indicator did not confirm a hard landing that has potential to destabilize the economy. The Z score is standing at a standard deviation of -0.5 which is not that extreme according to experts. A reading of 2, positive or negative is likely to cause a shock to the system.