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Has Australia Caught Dutch Disease?

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Dutch disease is the phenomenon where an economy becomes so inflated by revenues from the resources industry that there is a significant decline in the manufacturing sector. Sound familiar?

The sharp increase in foreign currency throws the exchange rate out of kilter making exports from other industries prohibitively expensive. Sound familiar? Could it be part of the reason why Australia’s GDP shrank 1.2 percent last quarter, the biggest fall in 20 years.

Of course the major cause for that drop in GDP was flooding in Queensland which forced a drop in mineral production. And there are positive signs in the economy, with ABS figures showing that both savings and household spending have increased. How can that be?

Economist Steve Keen believes we have caught Dutch disease and doubts retailers would agree with figures showing consumption is on the rise. He says ABS data can be misleading — the figure for savings includes the cost of servicing debt; as interest rates increase so does the cost of paying for our debts. If the RBA pushes up interest rates one or two times this year, as he predicts, that will, Steve claims, be a “death knell to the economy”.

Listen to today’s program for more on this and Steve’s thoughts on the carbon tax.

First published on CBS News

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