The Global Financial Crisis: 10 years on - KPMG Australia
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The Global Financial Crisis: 10 years on

The Global Financial Crisis: 10 years on

A decade has now passed since the GFC began in earnest. KPMG Economics have repeated the analysis undertaken within a 2009 McKibbin and Stoeckel study to see whether any of the identified shocks are at, or near, levels that indicate another crisis is imminent.


Partner, Chief Economist

KPMG Australia


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At an IMF seminar in Washington D.C on 7 September 2006 Professor Nouriel Roubini laid out his arguments that not only the US, but also the rest of the world, would enter a severe recession in the coming 12 months.

The predictions put forward by Roubini were virtually all proven correct. As it turned out, the US recession was in fact larger, deeper and substantially more pronounced that Roubini had anticipated; and its transmission to the rest of the world was faster and broader than anyone had imagined at the time.

Professor Dirk Bezemer, from the University of Gronengin, in a study about the need for research into the link between accounting concepts and practices and macro-economic outcomes, identified a dozen economic analysts who predicted the GFC against a set of criteria.

Roubini also noted of the GFC “this crisis is not a black swan event – a random outcome from a random distribution. This case is a build-up of vulnerabilities over time that will increase and provoke a crisis. There were tens of different signals that would eventually lead to a tipping point”

Warwick McKibbin and Andrew Stoeckel completed a study into the causes and consequences of the GFC, and within this piece of work, formalised three shocks that gave rise to the onset of the GFC, including:

"1. the bursting of the housing bubble causing a reallocation of capital and a loss of household wealth and a drop in consumption

2. a sharp rise in the equity risk premium (the risk premium of equities over bonds) causing the cost of capital to rise, private investment to fall and demand for durable goods to collapse

3. a reappraisal of risk by households causing them to discount their future labour income, increase savings and decrease consumption".

KPMG Economics have repeated the analysis undertaken within the McKibbin and Stoeckel study to see whether any of the identified shocks are at, or near, levels that indicate another crisis is imminent. In summary, our analysis of the McKibbin and Stoeckel tell-tale shocks suggests another GFC is unlikely in the immediate future.

Key insights

The KPMG Economics analysis found:

  • the housing bubble in the US has burst and hasn’t reappeared, and with tighter lending standards, the risk of extreme levels of defaults within the residential mortgage market appears to be low
  • while the Sydney and Melbourne housing markets are currently overvalued by about 14 percent and 8 percentrespectively, and a period of adjustment back to ‘fair value’ is likely to occur over the next few years, prices are not expected to go into ‘free fall’
  • equity risk premia in both the US and Australia have trended downwards, albeit Australia’s has been relatively more volatile than the US’s
  • it appears that equity investors in Australia are applying a higher risk premium than they were prior to the GFC
  • consumption activity, firstly in the US and then in Australia, reacted sharply once the breadth and depth of the crisis was beginning to be understood, although both countries have more recently seen it revert back to long run trend levels.

Given the findings of our analysis, it seems that neither the US nor Australia are on the precipice of another major financial crisis.

While there are numerous scenarios that warrant further analysis to see if they represent an early signal on increasing risk within the global financial system, one of the contemporary concerns relates to the elevated signs of stress in the domestic banking system in China. In our assessment of this risk, it seems:

  • rapid increase in property prices, outstanding residential mortgages equaling close to nominal GDP, rising defaults, combined with the fact that residential mortgage lending in China is on a non-recourse basis, indicates the risk associated with a failure of the Chinese housing market is not immaterial
  • corporate bond yields with the highest investment grade rating (AAA and AA) indicate that equity risk premia have declined from the beginning of 2009 to mid-2016; although there has been a slight upwards trend from mid-2016 onwards
  • the pattern of the residual between actual and projected equilibrium consumption indicates there has not been a systemic increase in anticipatory household risk causing consumers to alter their spending behaviour.

So despite the growing concern being expressed within the media, it would seem, based on this analysis, the risk of a new global financial crisis emanating from China in the near future is modest.

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