THE Australian dollar could drop as low as 40 US cents, relegating our economy to the status of an emerging market, a top fund manager has warned.

Vimal Gor, the head of income and fixed interest at BT Investment Management, says a shock hit to the currency will be around the corner if we don’t stop living it up pre-GFC style, and learn to spend within our means.

The “unique combination” of increased reliance on foreign capital and fast falling interest rates meant the Australian dollar was at “far more risk than most people think”, Mr Gor said.

“This reliance on outside capital to fund our lavish lifestyle, which is still stuck in 2006, puts us in a very different situation to pretty much every country that is currently running a zero or negative interest rate policy.

“Economic growth in Australian dollars has been so weak for a number of years, even as real economic growth continues to show some pretty encouraging headline numbers ... Yet we keep sending this growth overseas through high imports and paying out on past borrowings.

“This trend has deteriorated in the last year meaning we have to borrow from and sell assets to the rest of the world at a new, faster pace.”

He said that while the mining boom was in full force “everyone wanted to be Australia’s best friend”, but since the glory days had come to an end in 2014, the nation was more like “the little weedy kid no one wants on their team”.

After years of rampant borrowing “against the windfall of rising commodity prices, essentially acting as if they would last forever”, the big banks’ balance sheets more than doubled from 2003 to 2008, with much of the foreign cash going “straight into house prices”.

“The income windfall from rising commodity prices was spent as quickly as we earned it,” he said.

Mr Gor, a bearish commentator who correctly predicted last month’s Reserve Bank interest rate cut, said a dramatic drop in the Australian dollar was “highly likely” given the weakness in the latest GDP numbers.

“A shock downside could easily see it move to 40c against the US Dollar if current trends

continue, commodities fall to lows again and economic growth deteriorates,” he said.

The Australian dollar is currently about 74 US cents.