Australia’s momentary brush with recession is over. After less than twelve months we are now leading the world out of what was meant to be the crash of the century.
For a year, we have scratched our heads at the demise of others, cowered from the collapse that never came and frolicked with hand-outs. Just as we all had our glasses out for another free drink, suddenly it’s time to clean up after the party, count the debt and pay it off.
The world’s economies move like a cycling pack; uneventful until someone takes a fall.
For centuries, economic and financial crashes have cascaded through nations. Understanding why some economies collapse and others survive is the key to being prepared for the future.
World leaders faced three massive challenges during last September’s melt-down; defending their financial systems, protecting jobs and maintaining growth.
It appears Australia has risen to all three challenges. Our post-HIH reforms buttressed our financial system, our government surpluses offered the fiscal space for stimulus to protect jobs; and Australia’s food, energy and mineral-based economy supplied the internal demand of the world’s fastest growing economies while much of the world’s trade stagnated. Other lead economies in contrast were encumbered by ailing financial sectors, heavy debt burdens and a collapse in demand for manufactured goods.
Of these three factors, Australia’s export profile is a key reason for our privileged path through the global downturn. Like Norway, India, Indonesia, Greece and Israel, our GDP has been surprisingly resilient. Martin Sommers at the IMF found that the greater the high and medium-tech manufacturing component of a country’s GDP, the bigger the GDP fall.
That’s great for economies with minimal high-tech manufacturing like Australia, but bad for Europe and the Asian tiger economies. While overseas manufacturers were laying off millions, Australia’s commodity sectors were momentarily checked but never looked like faltering.
Starting in 2009, a new trend came into play. Manufacturing nations continued to fall relative to commodity exporters, but banking crisis economies fell even faster, rapidly losing GDP and watching unemployment rise three times faster than those with stable financial systems.
Again, Australia remained out of trouble. Our banks have fee-for-service structures, net interest margins and lending ratios that are the envy of the world, all of which have enabled us to keep well away from the sub-prime and derivatives carnage which took down the powerful peloton of the US, the UK and later, Germany, Netherlands, Ireland, Japan and Belgium.
The US has pumped three trillion dollars into its banks; Australia on the other hand, virtually nothing. In the end, nations with strong exports and banks lost just a fifth of the GDP compared to those without. On top of that, nations in banking crisis carried twice the government debt into the recession; 67 per cent of GDP against 36 per cent.
Australia’s debt-free bottom line and reasonable surpluses meant it could spend its way out of any domestic strife. As a general rule, nations stimulated their economies to the extent to which their balance sheets allowed. Saudi Arabia and China had the reserves to stimulate most, followed by Australia, US, South Korea and Canada. Medium debt economies were next with an average 3 per cent stimulus and finally, high debt nations which stimulated their economy less than 1.6 per cent. When lead economies are taken together, every additional 8 per cent of public debt at the start of the crisis saw an additional percent fall in GDP.
Job losses also tell a fascinating story, particularly when compared to pre-crisis unemployment levels. Though low at 5.8 per cent, Australia’s 45 per cent increase in unemployment from 4 per cent is the third largest of the major economies. Nations with reformed labour laws like Australia appear to have shed jobs but preserved GDP, whereas most European economies did the reverse. In a short recession like 2009, job-shedding economies like Australia are likely to prevail because workers are re-employed in growth sectors before their skills become obsolete. Had the recession been longer, job-preservers may have prevailed, thanks to public finances maintaining jobs and confidence through until recovery. Australia’s stimulus, stable real estate market and reformed workplace laws all played a role in maintaining business confidence.
As recovery signs strengthen, many commentators agree that a more modest stimulus would have been adequate. Just months after major spending announcements, Australia now has to contemplate pulling up its spending to avoid an interest rate rebound. Australia was the only nation to raise interest rates four times in seven months before the crash, on the pretext of an ‘inflation crisis’. Other nations had inflation but kept their nerve.
Because 70 per cent of Australia’s residential lending is on variable rates, a 4.25 per cent interest rate fall was sufficient to sustain housing starts and construction. The $3 billion first-home owner incentives should have been implemented after the interest rate falls took effect. They should also have been restricted to the new housing projects Australia desperately needs, rather than subsidizing profit-taking investors selling off existing apartments into inflated markets.
Analysis of all the world’s lead economies tells us why Australia now wears the yellow jersey. Resource exports and our minimal manufacturing exposure held up our GDP. A functional banking sector accounts for much of our 2009 domestic performance. Australia elected to stimulate at three times the IMF’s recommendation for no better reason than that it could. Sure, there was no science around stimulus size and design in 2008, but that was even more reason for a timely and targeted intervention followed by evaluation and refinement. Credit obtained cheaply is cherished least. Even harder than resisting the temptation to spend away surpluses, will be switching off the fiscal fire hydrant before Australia’s charmed economy bursts for the second time in two years. Therein lies the challenge for both sides of federal politics come Budget 2010.
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