October 25, 2017

Is Australia’s luck about to run out?

How Australia escaped the global financial crises of the last 25 years

AS CRISIS after crisis has rocked the world, Australia somehow escaped relatively unscathed. But that could be about to change. It’s “inevitable”.

Australia is blessed with space, resources and its proximity to growing Asian markets.

THERE’S more to Australia than good weather and a famous laid-back lifestyle — we’ve now powered through 25 years without tasting economic recession. The quarter of a century milestone means Australia now has the longest period of recession-free growth of any developed country ever.

Famously dubbed “The Lucky Country” — economists believe our true blue good fortune has played a part in this stunning achievement, but there’s more to it than that.

“Luck has certainly played a role,” said Shane Oliver, chief economist at financial services company AMP.

“We are blessed with a lot of things that other countries don’t have like ample resources, space and relatively sensible politics in the grand scheme of things. “But, really, we’ve been riding on the major economic reforms of the past and that makes us look like The Lucky Country.”

The economic growth has not been felt by all Australians.

FLOATING THE DOLLAR

So what kept the Aussie economy insulated while the rest of the world was reeling from global economic gloom?

“The moves to make the economy more efficient and deregulated through the ’80s and the ’90s resulted in a more flexible economy — in particular the impact of the floating of the Australian dollar,” Mr Oliver said.

“This means that whenever there’s been a downturn globally, the Australian dollar tends to go down which has shielded Australia somewhat.

“The Aussie dollar has fallen through the global recessions, which made our exports more competitive. But, more generally, the Australian economy is more flexible than it used to be.”

When the Global Financial Crisis (GFC) hit in 2008, this good financial management came in handy as the Labor government boosted public spending by a whopping 13 per cent in an attempt to stimulate growth.

China also held up pretty well through the GFC, according to Mr Oliver which some economists say shielded us and our exports during the darkest days of the latest major global downturn.

NSW is experiencing a massive surge in infrastructure spending.

A DISCONNECTED ECONOMY

“Another element is the cycles across our economy have become disconnected,” Mr Oliver said. “For years we had a mining boom which boosted Western Australia and other parts of Australia which were exposed to the mining sector — but at the time, the rest of the economy was relatively subdued.

“And (at) times during the last decade, you could argue that NSW has been in recession but it’s all been smoothed out nationwide because of the mining boom.

“More recently, the mining boom has fallen into a hole which has enabled the pressure to come off NSW and Victoria because interest rates have come down, the Australian dollar has come down — that’s enabled the south eastern states to rebound.”

However, economist Jason Murphy said it hadn’t all been “tea, scones and sunny afternoons for 25 years.”

The national picture was good but misleading, he said, with several states falling into serious trouble over the last couple of decades.

“WA is the most recent example, with an economic bloodbath following the end of the mining boom,” Mr Murphy said. “It was hard yakka for people trying to provide for their families, as unemployment shot up and businesses went broke. “But that human misery doesn’t show up in the national economic statistics because the statistics average out over all the other states.”

Some economists say a recession is inevitable in the near future.

SO WHAT ABOUT THAT GOOD FORTUNE?

Tim Harcourt, an economics fellow at the University of New South Wales said Australia had made its own luck through good economic policies, the currency float, tariff changes and the embrace of Asia.

Apart from natural resources and Australia’s close ties with booming Asian economies, Mr Oliver also said we’ve even been lucky with the way our national statistics fall.

“We had a bit more weakness around the time of the GFC and we could have ended up with two quarters of negative growth and it would have looked like a recession — but fortunately that didn’t happen,” he said. “We only had one quarter of decline in GDP.”

Former Prime Minister Kevin Rudd spent big in 2008 to stimulate growth.

AND HERE COMES THE BAD NEWS...

Before we give ourselves a collective pat on the back, Mr Oliver reminds us that it’s not all rosy in terms of our actual living standards.

“The last few years have been a bit so-so,” he said. “We’ve had very high levels of underemployment, wages growth has stagnated and houses are completely unaffordable — so you don’t need a recession to have big issues.”

Mr Murphy said underemployment had shot up as unemployment had shrunk — which was a big part of why wages growth had been so weak in Australia recently.

“Underemployed represent a big source of untapped potential and the economy will need to add a lot of full-time jobs before it has soaked up all the people willing to work in them,” he said.

The Aussie economy was just “muddling along” according to Mr Oliver as housing slows and consumer spending remained weak. And there was always the risk, after more than 25 years of growth, Australia could become complacent.

“We are probably going to go for at least another few years before we have that recession some people say is inevitable,” said Mr Oliver.

This story first appeared on News Limited 11:36am October 25, 2017.