Luckiest economy shines in down-and-out world

Australians sure are a stubborn lot where their economy is concerned.

With global growth crashing and markets reeling, Kevin Rudd in April did what any smart prime minister would: he warned that the nation's first recession in 17 years was "inevitable".

Australians are having none of that. The economy grew 0.4 percent last quarter, defying trends in other wealthy countries.

This is one time when a politician is happy to be proven wrong. Yet two things are worth noting - one bad, one good.

One, while the Asia-Pacific region's fifth-biggest economy has avoided the technical definition of recession, the two engines of the recent boom, exports and business investment, are sputtering. Try telling the growing ranks of unemployed this isn't a recession.

Two, even as Australia's challenges increase, it will still be the envy of the developed world.

The $14 trillion US economy is on its back, the euro area's is in turmoil and Japan's is deflation-bound. Sure, growth in China's $3.2 trillion economy is a plus for resource-rich Australia.Yet China's gross domestic product isn't large enough to offset a hobbled international financial system.

It's also worth noting that Australia's unexpected expansion, driven by government cash handouts and record interest-rate cuts, masks a darker picture. Rudd said that without the government's move to dole out more than AUS$12bn ($9.9bn) to lower-income earners, the economy would have contracted about 0.2 percent.

Measures of corporate investment contain more ominous signs. They showed outlays on machinery and equipment tumbled by the most since the economy was last in a recession in 1991. Rio Tinto Group has slashed its global spending by $5bn to a total of $4bn this year. BHP Billiton Ltd shut its $2.2bn Ravensthorpe nickel mine in Western Australia.

Those amounts seem negligible as the US throws trillions of dollars at its economy.

Even so, they demonstrate how spending is being cut and workers are being fired as the worst global slump since the Great Depression curbs demand.

The nation's trade balance unexpectedly turned to a deficit in April this year as lower prices for coal and iron ore led to the biggest drop in exports since 1997. It showed that global events are increasingly weighing on Australia.

Australia has been lucky so far. Its fortunes are changing before investors' eyes. And it's still an open question whether the country will experience the same type of crash in real estate values that has taken place around the world.

That's the bad news. The good news is that even as Australia succumbs to the global recession, its economy will be the envy of peers in the developed world.

Australia is often referred to as ‘the lucky country', the sardonic title of social critic Donald Horne's 1964 book. It's a reference partly to the nation's endowment of natural resources, sometimes enviable weather and colourful history. Even after last week's data, it's hard not to view Australia as a lucky economy, too.

Opposition leader Malcolm Turnbull is deeply concerned about the budget surpluses of recent years swinging back toward deficit. It's hard to get bent out of shape. Net debt will peak at 13.8 percent of GDP in fiscal 2014, treasurer Wayne Swan said last month. Most advanced economies will have a debt-to-GDP ratio of 80 percent then, Swan said.

Growth is positive, ample fiscal ammunition remains and the Reserve Bank of Australia has 300 basis points worth of interest rates to cut. Global chaos, triggered by last year's collapse of Lehman Brothers Holdings Inc, prompted Reserve Bank governor Glenn Stevens to slash borrowing costs by a record 4.25 percentage points from September 2008 to April this year.

Australia's problems are good ones to have at the moment. Stevens is even counselling caution about cutting rates too far because that may encourage borrowers to take on debt they can't afford.

It would be nice if the US Federal Reserve, Bank of England and Bank of Japan were thinking such thoughts.

The contrast globally is striking. Japan's economy shrank 9.7 percent in the year, the UK's GDP dropped 4.1 percent, the euro area contracted 4.8 percent and the US slid 2.5 percent.

China, Australia's largest trading partner, grew 6.1 percent. Those relative strengths explain why the Australian dollar is up more than 13 percent versus the American currency this year.

Not everyone is bullish on the economy's prospects. Stephen Koukoulas, a Londonbased analyst at TD Securities, goes so far as to say that Australia "is about as weak as the US" based on reports of surveys tracking services and manufacturing.

Risks certainly do abound. One is Australia's growing reliance on demand from developing China. The longer that Asia's second-biggest economy has to live without a profligate US consumer, the harder it will be to maintain stable growth.

Even in its worst moments, though, Australia is among the least unsightly economies anywhere. It does have its share of problems as growth slides everywhere. They are still the kinds of challenges that most world leaders can now only dream about.

William Pesek is a Bloomberg News columnist. The opinions expressed are his own.

Print | Email | Discuss this article

| Share |

READERS' COMMENTS

Click here to post a comment

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic. Arabian Business would like to point out that only comments relevant to the story will be published. Any containing personal insults or inappropriate language will not be approved.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Enter the words above *
Please click post only once - your comment will not be published immediately.

MORE FROM ARABIANBUSINESS.COM