Australia’s net foreign debt has just passed the A$1 trillion mark, roughly 60 percent of the nation’s gross domestic product. Alarm bells should be ringing somewhere, but somehow the “lucky country” continues to be seen by foreign investors as a safe location.

Australia may have good government but the numbers make the problems of East and Southeast Asian economies seem almost paltry by comparison.

For sure, the Australia dollar, now at A$0.73 to US$1.00 compared to a peak of almost A$110 during the mining boom, has been on a slide that should make exports more competitive. But the decline so far has evidently not been enough to curtail an already very high current account deficit. The March quarter saw the second highest deficit on record – A$21 billion -- and for a full year the nation is looking at a deficit of A$80 billion or so, or 5 percent of GDP, not far short of the 6 percent hit in 2007.

This figure is rather more important than the recent announcement that GDP grew 0.9 percent in the most recent quarter and annually at 2.4 percent. That headline number fooled many in the markets that Australia continued to be a relatively strong economy, at least compared with other rich countries. But the rise was entirely the result of a substantial increase in the volume of mineral exports. Meanwhile the prices of those minerals continued to fall much faster than import prices, so the terms of trade declined further. Export prices in the March quarter were down 4.9 percent of a year earlier while import prices fell just 0.8 percent.

The domestic economy actually contracted during the latest period – doubtless a factor in the struggle that the Liberal Party-led coalition is facing in the election set for July 2. Despite the lacklustre leadership of Bill Shorten, the opposition Labor party could yet overtake Prime Minister’s Malcolm Turnbull’s Liberal party-led coalition.

Servicing the long-term debt problem is an increasing concern, particularly if US interest rates begin to rise while commodity prices do no more than stabilise around current levels. Lower interest rates at home would help the domestic economy and should cause a further fall in the Australian dollar, which would improve the trade balance. But with the need for continuing large inflow of debt capital inflow, the Reserve Bank room for maneuver is limited.

Direct foreign investment is weakening because most of the mining and infrastructure-related spending for the China export boom is now over. So debt finance will increase in importance. Australian banks already have huge net foreign debt and the federal government is now running a budget deficit of US$37 billion, a huge turnaround from the days of the boom. Though still only around 2.5 percent of GDP, the pressure is on the government to bring it down drastically over the next five years.

Given the structure of the economy, unless commodity prices recover, a recession for Australia look a distinct possibility.