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Westpac’s James Shugg on Australia

Can you remain optimistic about Australia in 2012 considering the slowdown in China, Australia’s chief customer for iron ore and other commodities?

We are optimistic in a relative sense. We think the Australian economy will grow 2.5 percent in 2012. But a lot of that is catch-up from the huge disruptions in exports that we had in the first half of this year from the flooding in Australia. The domestic part of the economy that is not exposed to mining actually is struggling at the moment. Retail sales, the housing market, and house prices are falling slightly in Australia, and unemployment has started to rise. And with inflation very benign, we think the Reserve Bank will begin a sequence of interest rate cuts.


How linked is Australia to Europe and the U.S.?

A lot less than it used to be. But it is still there: If America and Europe stop buying Chinese output, then the Chinese economy slows, and that puts downward pressure on the Australian economy. Australia is the repository of the resources that China uses to turn into things the rest of the world wants. Australia is in a very fortunate position because of that, but it is still dependent upon a healthy global economy.


What about recession in the U.S.?

We are not forecasting a recession in the U.S. But this is a very atypical recovery, with housing not participating. I have been arguing that the U.S. needs to give green cards to wealthy families in other parts of the world as long as they buy a foreclosed house. That could make a substantial difference in the housing market.

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