Bolstered by an expanding resources sector and energy-hungry Asian trading partners, Australia is the only major economy to have avoided a technical recession in 2009 — recording only one quarter of contraction in gross domestic product. (A technical recession is defined as GDP falling for at last two successive quarters.) Indeed, the commodity-rich country is being called the “wonder from down under” as the nation enters its 19th straight year without a recession. It also became the first G-20 nation to tighten interest rates since the financial turmoil began.
Continued improvement in confidence — and surprising strength in consumption, investment and exports — triggered inflation concerns that prompted the country’s central bank, the Reserve Bank of Australia (RBA), to kick off the tightening cycle in early October, and boosted expectations of further interest rate hikes over the coming year. For five months in 2009, Australia’s interest rates were held at a 49-year low “emergency” rate of 3% before the RBA hiked up the official cash rate for three consecutive months to 3.75%.
With inflationary pressures building, Australia’s economy looks set to return to a 3.75% growth rate in 2010. This upbeat forecast follows a year in which Australia has been the only G-20 country to experience positive GDP growth, thanks to solid export demand and mining investment along with a massive government economic stimulus, among other factors. That package — worth more than A$70 billion (US$64 billion) and including A$20 billion in cash handouts to low- and middle-income earners — boosted private consumption and business investment, cushioning the local economy from the worst of the global economic meltdown. After one three-month period when the economy went backwards, it grew 0.4% in the March quarter, 0.6% in June and 0.2% in the September quarter, resulting in annualized economic growth of 0.5% for 2009. A rebound in business and consumer confidence, housing construction recovery and increased public infrastructure spending are expected to underpin this year’s growth.
The jobless rate peaked at 5.8% before falling to 5.7% in September — significantly lower than other industrialized countries. Observers note that the low rate resulted from employers’ efforts, in the face of a sharp downturn, to cut employees’ hours rather than their jobs. Meanwhile, according to JP Morgan economist Helen Kevans, “owing to the swelling investment pipeline, including the fresh wave of natural resource projects now getting under way, employment growth should accelerate in 2010.”
The most significant gains in employment are likely to come in the resource-dependent states, such as Western Australia (WA) and Queensland, says Kevans. In WA, for example, recent approval of the A$43 billion Gorgon Gas Project, along with another A$116 billion of approved investment projects, will create tens of thousands of direct and indirect jobs. However, she also forecasts that the labor market will tighten, highlighting the risk of labor shortages and wage pressures towards the end of 2010.
Healthy Banking Sector
Key to Australia’s success story so far is the fact that its banks emerged from the financial crisis relatively unscathed; not only are they solvent, but their bad debts are believed to have peaked. Peter Kriesler, an economics professor at the Australian School of Business at the University of New South Wales, notes that the government took important steps to strengthen the financial system, including guaranteeing the deposits and wholesale funding of Australia’s financial institutions. “Prudential supervision of the banking system was much tighter than in the U.S. We only have four major banks, and they were more risk averse than their U.S. counterparts,” he says.
Federal Treasurer Wayne Swan credited government stimulus measures with preventing the economy from contracting as gross domestic product in the September quarter expanded at an unexpectedly low 0.2% from the quarter before — caused by a massive drag from net trade. Net exports drained 1.6 percentage points from GDP growth because of a drop in volumes and a near 6% bounce in imports. The net trade drag was expected to diminish in the final quarter, if not reverse, owing to lower imports, particularly given the rise in stocks and a belated rise in export volumes. Notes Kevans: “While the effects of government stimulus were beginning to fade, public infrastructure spending was stoking demand and prospects were strengthening for business investment.”
According to a number of global commentators, the Australian government has greater scope to ease fiscal policy than governments of most other Western countries because it started from a position where interest rates were already high, the budget was in surplus and there was no net public debt. But Nigel Stapledon, associate head of economics at the Australian School of Business, disagrees that fiscal and monetary policy entirely rescued Australia from trouble. “While of course they contributed to a quick economic recovery, the underlying reason why Australia was not mired in recession is that the economy was in balance.”
Australia’s last recession was caused by a major contraction in the construction sector leading to an excess of supply, says Stapledon. “So unlike the 2009 downturn, where the U.S. had an oversupply of housing — and housing construction fell 70% — we had our peak in activity in housing five years ago. The mineral boom meant the economy was doing extremely well, and as a precaution, the RBA tightened rates coming into the crisis and reduced housing debt supply. You always have some imbalance in the system, but in Australia the degree was relatively small. Housing prices scarcely fell.”
In addition, fears of a mining bust were never realised, according to Kriesler. “Australia has had mining booms and busts before, so that was always the risk. The risk of China falling in a hole and commodity prices collapsing didn’t materialize. Mining companies paused. They killed off a few uneconomical projects, and now they are cautiously going ahead.”
Despite the good economic numbers, the prevailing mood is not universally positive. Risk of serious contraction in Australia may have passed, but business leaders are cautious about the speed of the economic recovery. Many expect business conditions to remain difficult, noting that aggressive cost cuts and productivity gains — rather than a strong pickup in demand-led revenues — boosted earnings.
Some corporate chiefs are uncertain that the recent economic improvements can be sustained. They worry about drops in confidence as the fiscal stimulus peters out, interest rates rise and the dollar strengthens. Some are not buying the global recovery story. And even though credit remains tight, most don’t see either the demand or supply of credit as a major headwind. They have mostly de-risked their balance sheets.
Kriesler believes corporate chiefs are right to be cautious. “There is an assumption by an element of the private sector that the bad times are over. But it is not at all clear that they are. We know countries look as though they are emerging from the financial crisis but I don’t think we can be sure we’re out of the woods yet. We are walking a knife edge and could just as easily fall off.”
Yet strong demand continues for Australia’s resources, sparked by China’s massive investment program in infrastructure and industry. Australia’s major Asian trading partners are in good shape. Japan and South Korea are expecting modest growth, and though China’s growth is predicted to slow — from 12% to 7% — that is still strong growth by world standards. Add into the mix Australia’s net debt position, expected to peak at 10% of gross domestic product in 2013, and the outlook appears bright.