Over-investment a risk for Australia: S&P
Economic spending is reaching levels typically seen before major financial crises, prompting warnings the over-investment could lead to a significant economic correction.
And Australia, as a major commodities exporter, could be one of the most at risk, according to a new report from credit rating agency Standard & Poor’s.
S&P singled out China as the biggest risk factor. The world’s second largest economy has the highest investment-to-GDP ratio in the world, but a post-financial crisis stimulus binge has meant much of the spending had been done inefficiently.
While economic investment is typically a healthy thing, over-investment had created an ‘‘overhang’’ in a number of countries, including China.
As returns on investment diminish, rational investors pull out, sparking a downturn in the economy.
The severity of the dip depends on the magnitude and speed at which investors retreated – with the global financial crisis a case in point.
But the author of the report, S&P analyst Terry Chan, said the highly government-driven Chinese economy was able than most to manipulate levels of investment to suit its economic needs.
‘‘They will have an influence in what happens in their economy through their state-owned banks and state-owned enterprises,’’ Mr Chan said, pointing out he was tipping 8 per cent growth in the Chinese economy for the year.
‘‘We’re not saying there will be an economic crisis,’’ he said. ‘‘We’re saying the investment cycle could turn; there could be an economic correction.’’
But the key risk remains whether the newly-installed Chinese leadership can wrestle with its economic challenges. It has long identified its reliance on investment-led economic growth as a key problem, and has stated its desire to move to a more sustainable domestic consumption-led growth model.
China was the only country identified by S&P at ‘‘high risk’’ of an economic correction due to over-investment.
But Australia was in a group of eight countries – including fellow commodities exporters Brazil, Canada and India – considered next most at risk.