Australia's extraordinary 27 years without a technical recession would come crashing to a halt if China's economy were to falter, warns Grant Samuel Funds Management.
GSFM adviser Stephen Miller, who was head of income for BlackRock Australia for 14 years, has made some dire warnings about both Australia's housing boom and our dependency on China.
In a paper titled "The boy who cried wolf was right at the end", Mr Miller said that curbs on private lending could end up intensifying disinflation of deflation in house prices – which would in turn reduce household wealth and consumption, sending GDP lower.
"I am doubtful as to whether these developments alone might cause a recession, but that is where the other key risk – a sharp slowdown in China – comes into play," he said.
Australia has always been "far and away" one of the most highly leveraged to China, Mr Miller said.
"That, in large part, accounts for the extraordinary 27 years since a technical recession as Australia rode on the coat-tails of China’s emergence as an economic powerhouse," he said.
That leverage has come about through the "extraordinary" demand for Australia's commodity exports, he said, which has sustained Australia's GDP and income growth through tough periods.
"The downside is that were China to 'sneeze' then Australia may well catch 'pneumonia'. Were this to occur when the consequences of housing excess were working their way through the system, then the 27-year dream run may well come to an end," Mr Miller said.
"In this context too, the recent emergence of diplomatic tensions between Australia and China may have adverse economic consequences."
To make matters worse, markets are underplaying the risks associated with the trade war between the US and China, he said.
"Econometrically, the direct impact on global growth might at this time seem small, but the indirect effects through the impact of disruption of global supply chains on financial conditions, business sentiment and internecine ‘policy retaliation’ are potentially quite large."