Friday, January 4, 2008

Buckle Up! We're In For A Wild Ride...

Haven’t we seen all this before? For the past six years real estate prices have boomed. Even if they slowed down somewhat in parts of Sydney in the last couple of years, the rest of the nation has continued to experience growth in prices. For the last few years the stock market has shown double digit returns, although the past six months have been shaky.

At the same time, over the past few years, inflation has, until last year, been contained below three percent, despite strong economic growth. More recently, grocery and petrol prices have been rising strongly, and now threaten to push inflation out of the comfort zone. Interest rates have been creeping up slowly, and now the threat of inflation looks like pushing them further. On top of that, the banks have chosen to raise rates independently as a result of the United States credit crunch.

And that’s a warning bell. No matter how strong our own economy is, it always suffers as a consequence of adverse international conditions and that cannot be avoided.

All this should be sounding familiar. Back in the late eighties there was a strong real estate boom, followed by rising inflation, followed by rising interest rates, and ending in the recession we had to have. Housing prices remained flat or even fell for an extended period of time until the 21st century boom arrived.

While it is by no means certain that we “have to have” another recession, you can be certain that the economic climate is changing. Ironically, Kevin Rudd could end up being blamed for things which are not his fault.

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