Getting back on track

Australians bounce back. Whether it's from defeat at the hands of the English in an Ashes cricket series or from an economic downturn, they don't stay down for long. Not surprisingly, therefore, though real incomes and unemployment have suffered, it is Australia that is leading the developed economies out of the global economic crisis.

True, its experience of the crunch wasn't close to the scale of that in the US, UK and continental Europe. In fact, Australia managed to avoid the definition of recession, having suffered only one quarter of contraction. But the figures for the second quarter of this year, showing GDP rising by 0.6 per cent, were impressive, well ahead of economists' forecasts of 0.2 per cent.

The background, it has to be said, was pretty favourable. Australia was strong going into the downturn, having enjoyed outstanding growth over the previous 15 years, averaging 3.5 per cent.

A key feature has been the shift in trade relationships away from Europe and North America to the Asian region. Australia's largest export markets now are Japan, China, the US, South Korea and New Zealand. China's dominant emergence, leveraged the effect further by its call on commodities. The demand for minerals to feed its insatiable steel mills has been something of a bedrock of Australia's boom for much of the past decade.

A natural advantage

Rich in natural resources, Australia is a major provider of mainstream agricultural products such as wheat and wool, likewise in minerals, for instance iron ore, also gold, much-favoured in troubled times. Ditto in energy, whether in traditional form, like coal, or modern guise like liquefied natural gas (LNG), recently evidenced by the fruition of the offshore Gorgon project. It may even be noted that, thanks to the quality of their upbringing, even camels are a major export.

Still, as in most modern economies, it is the services sector that dominates, accounting for 68 per cent of GDP, although the agricultural and mining sectors, representing a modest 10 per cent of GDP, account for 57 per cent of the nation's exports. As common elsewhere, manufacturing has been in relative decline, at 10 to 12 per cent of GDP, sufficient to prompt policy initiatives in response.

In the services context, it has obviously helped that the county's banking sector was not tainted by the extraneous elements that have so badly impacted other Western systems.

Shielded from takeover by the so-called Four Pillars policy instituted by the Keating administration in 1990, the country's main banks have never needed to crank up the riskometer. High profitability and capital ratios served well to insulate from the worst of the collective hit.

Exposures to so-called ‘structured finance' instruments, where banking toxicity has tended to lurk, are small relative to international peers. So too are overseas interests. The ‘big four' lenders have just one-tenth of their assets on average beyond Australia and New Zealand. Notably, again comparing the global scene, the previously hyped property sector has not collapsed, aided by rapid interest rate cuts.

Prompt government intervention

Of course, the policy dimension is very relevant. The nature of government responsiveness to the crunch is a matter for debate globally. Australia has played its part in delivering aggressive stimulus in an effort to ward off any chance of a dangerous, downward spiral. The government has received international kudos for its prompt interventionism, which has sparked a revival in consumer and business spending.

On top of prior actions, in early February it unveiled a A$42 billion (Dh139 billion) fiscal package. At the same time, Australia's central bank, the Reserve Bank of Australia (RBA) slashed its benchmark interest rate by another percentage point to 3 per cent — the lowest level in 49 years. Again, such dramatic adjustments took place from a position >of relative strength prior to the crisis, namely of a series of budget surpluses.

When Kevin Rudd led the Labour Party to power in 2007, he promised to be a ‘fiscal conservative' to keep the established solidity. But when Wayne Swan, his treasurer (finance minister), presented the government's second budget on May 12, much of course had changed. An underlying cash deficit was presented for 2009-10 of almost A$58 billion (Dh192 billion), or 4.9 per cent of GDP, one of the largest ever, the first deficit since 2001-02, and to be contrasted with the A$20 billion (Dh66 billion) surplus of the previous year. With apparent public and pundit backing for previous measures, the budget was turned largely into an extended support operation for the economy.

Extended support operation

On the spending side it proposed to invest A$22 billion (Dh72.8 billion) in infrastructure, including ports, interstate roads and new railways in big cities. Clean-energy projects, mainly solar and carbon capture from burning coal, would get A$4.5 billion (Dh14.9 billion). There was also an allocation of A$13 billion (Dh43 billion) in cash handouts to low-income workers and farmers.

A A$10.4 billion (Dh34 billion) programme the previous October had provided lump-sum cash payments to pensioners and low- and middle-income families in the hope of provoking a quick recovery in consumption spending. As for financing, richer Australians will sacrifice the most. The government will slash tax breaks for private health insurance, pension contributions and other forms of middle-class welfare. Resulting from these ‘pump-priming' commitments, net debt will rise by almost A$200 billion (Dh662.6 billion) in four years, but nonetheless its total will remain comfortably below 20 per cent of GDP, whereas the average among advanced countries will rise to about 80 per cent by 2014.

Planning to issue bonds for its funding, Rudd has tried to assuage market concerns by saying that as soon as economic growth tops 3 per cent again, spending growth will be limited to two per cent a year to try to balance the budget.

However Australia is still uncomfortably dependent on what is happening in the rest of world, particularly China, whose own efforts at budgetary stimulus have been something like nine times greater. Commercial and political relations have in some respects been less than salubrious, but the mutual upsides are obvious.

In need of structural changes

Despite the potential cushion of the Aussie dollar's floating exchange rate, export growth has remained flat in comparison to strong import growth, and, although higher commodity prices have returned in the surprisingly strong rebound among global asset markets, economists warn that structural change is needed, for example to reverse the decline of manufacturing, responsible for what has become a narrow export capability.

In the balance of payments, large current account deficits have persisted for more than 50 years. Besides simply a faster growth rate domestically, a lack of international competitiveness and heavy reliance on capital goods from overseas mean that deficits are set to remain or even rise in future.

The overall outlook, then, might be termed cautiously favourable. Budget forecasts foresaw GDP growth lifting from a negative 0.5 per cent this year to 2.25 per cent in 2010-11, followed by 4.5 per cent in 2011-12, bullish indeed.

In fact, specific support for the economy might begin to be withdrawn in the fourth quarter of this year. A return to positive interest rates in real terms would signify a restoration of normality, as a 90-day bank-bill rate of about 3.4 per cent currently is no crumb of comfort to a saver, with inflation still running at 3.9 per cent.

And normality would be just fine for the self-styled lucky country.