Australia is Fighting Recession

In a May Statement on Monetary Policy the Australia’s central bank said the nation’s economy will shrink 1.25 percent in the 12 months through June before the “gradual” recovery in 2010. But comparing with other countries outlooks the Australian downturn looks relatively moderate. Why Australia is doing better than other developed economies?

At Trading Economic we think that the main force behind Australia’s resistance to the recession is stronger state of the Australian banking system, significant policy stimulus and monetary policy easing. In fact, since last September, the interest rate has been lowered by 4¼ percentage points and, unlike in many other countries, the bulk of this reduction has been passed on the households. Moreover, household spending is being boosted by tax bonus payments and government transfers. In March and April consumers received as much as A$950 ($705) in cash handouts and household disposable income was up 14 per cent in nominal terms, or 10 per cent in real terms, over the year to the fourth quarter. Also, although housing construction remains weak, loan approvals for new construction have increased and a relatively high proportion of households report that now is a good time to buy a dwelling. Looking further, the Australian dollar depreciation in the second quarter of 2008 and recent growth in exports to China may still keep the terms of trade above the long-term average.

However, there are main reasons to be concerned. After years of very high levels of investment, many firms have scaled back their development plans due to the general deterioration in the economic outlook, a significant increase in uncertainty and risk aversion, and tighter financial conditions. Also, reflecting the slowing in the economy, labor market conditions have weakened. And although in April there was some improvement in the job numbers, the unemployment rate is well above its low of 4 per cent in early 2008 and job advertisements and business surveys, suggest a further decline over the months ahead. Lastly, we should also think what may happen to the Australian economy once the effect of government transfers will fade away and the China’s economy won’t be fuelled anymore by its stimulus package.

Anna Fedec,
5/8/2009 11:47:16 AM