(23 May 2011 – Australia) The Reserve Bank of Australia (RBA) director Warwick McKibbin and US economist Nouriel Roubini have raised the spectre of another sharp correction like the global financial crisis.Mr Roubini, who predicted the global financial crisis, has warned that China’s economy is overheating and will experience a sharp slowdown in 2013.
The budget handed down last week by Treasurer Wayne Swan is predicated on the boom in commodity prices continuing for at least four years, with domestic growth at close to full speed.
Professor McKibbin warned that loose global liquidity is creating a bubble in commodity markets that is likely to be even bigger than the one that preceded the GFC.
He says global inflation ‘is out of the bag’ and warned that when interest rates rise, that in response, ‘a whole bunch of assets and balance sheets will get crunched’.
He said last week price pressures were being driven by conditions similar to those of the Vietnam War era, when the US government was printing money, coupled with China growing at rates ‘above capacity’.
But Treasury secretary Martin Parkinson this week dismissed concerns about a serious correction in China. He said the budget’s ‘central scenario’ was one of solid medium-term growth for Australia.