Chickens coming home to roost

There was an interesting commentary from Wall St last week on the true state of the Australian economy (reported in the Australian). Whilst I am not in total agreement with Harry Dent, he does make very good reading (that article was not written by Harry). Basically, we are in for a period of deflation and deleveraging. David Uren wrote recently in the Australian about it.

Australians since the Second World War ended have been brought up on a diet of ever increasing property prices. That is the foundation stone of almost every Australian family’s wealth. That period now appears to be over for sometime.

Very importantly, it is that wealth that provides the security for almost every business loan in the country to SME’s. My recent blog about China is most likely to hit companies listed on the ASX. Not so much the SME sector unless they are directly servicing the resources sector. What will hit the SME’s is breaching of their loan covenants where they are secured against depreciating real estate prices. Some banks are likely to want to reduce or eliminate credit lines as a result. Inevitably this will result in insolvencies and a domino effect across the economy, including into the professional services sector.

Add to this, deflationary fiscal policy at Federal and State level, and we have the preconditions in Australia for the scenario painted by Dent. The nightmare storm: Slowdown in China, domestic deflation, and enforced SME deleveraging. Since SME’s are the largest employer by far, employment……………future blog.