of growth — FT.com
Australia reaches milestone of a quarter-century of growth
Quarter-century without recession credited to good governance and luck
by: Jamie Smyth in Sydney
Australia has notched up a quarter century without recession, a record that has pushed
living standards to among the highest in the world.
The country last suffered a recession in 1991 — the year the Wallabies won their first Rugby
World Cup and pop stars Michael Hutchence and Kylie Minogue broke up. Economists say
luck and good management have enabled Australia to sidestep global crises, including the
2008 financial crisis, that hobbled other countries.
Australia is on course to surpass the Netherlands’ modern era
record of 26 years of consecutive growth between
1982 and 2008, achieved on the back of its discovery of North Sea oil.
“Much of the success is due to reforms that were put in place in the 1980s and 1990s, which
have made the Australian economy more flexible,” said Paul Bloxham, HSBC
economist. “These include sharp reductions in tariffs, deregulation of the labour market,
the floating of the Australian dollar and deregulation of the financial system.”
Bob Hawke, Australia’s prime minister from 1983 to 1991, says he was stung into reforms
by Lee Kuan Yew ,
the late Singapore prime minister, who warned Australia it would end up the “poor white
trash of Asia” if it did not open its economy.
Saul Eslake, an economist, says the creation of a highly credible monetary policy regime
under the Reserve Bank of Australia, which has largely kept inflation in its target range of
23 per cent, has been critical to success.
“The RBA was the only central bank in the developed world which didn’t make the mistake
of leaving interest rates too low for too long in the early 2000s,” he says. “This was a major
reason that Australia didn’t have a housing bust or a domestic financial crisis in 200709
when so many other western countries did.”
Unlike many of its western counterparts, Australia maintained fiscal discipline in the late
1990s and early 2000s, with then prime minister John Howard delivering budget surpluses
in 10 of the 11 years up to and including 20078.
But good management is only part of the story. Australia is blessed by its rich resource base
and its proximity to Asia, the world’s fastestgrowing
region. Surging demand for iron ore,
coal and other minerals from China over the past two decades has boosted Australia’s terms
of trade and national income.
“With the exception of China itself, there’s no country on earth which has derived more
benefits from the rapid growth and industrialisation of China,” says Mr Eslake.
High immigration and rapid population growth has helped Australia outperform (http://ne
other western economies and
escape recession. This has helped fuel a housing boom over the past three years, which has
supported the economy during a prolonged commodities slump.
Viewed from abroad, Australia is often labelled a resource economy similar to Canada or
Brazil, both of which have suffered recent recessions following sharps falls in commodity
prices. But it is much more diverse and is enjoying a boom in services exports
to China, including education and tourism.
A sharp depreciation in the Australian dollar has acted as a shock absorber, with
annual economic growth (http://next.ft.com/content/856c414427a611e68ba3cdd781d0
2d89) of 3.1 per cent in the first quarter.
Some observers warn Australia’s economy is more exposed now than at any time in the past
25 years to an external shock because of very high household debt levels, rising public debt
and reliance on China. Population growth is also slowing, down to 1.4 per cent in 2014
compared with 2.2 per cent in 2008.
“The big risk for Australia is the next recession,” said Chris Richardson, economist at
Deloitte Access Economics.
“Events happen and we just don’t have the same degree of protection that we had before the
financial crisis when the budget was flush with cash.”
And as Asia’s meteoric economic rise has driven Australia’s success, some warn the region
could provide the type of shock that would bring it to a halt.
“Asia has been a huge source of strength for Australia, now taking the vast majority of its
exports,” said Matt Sherwood, head of investment strategy at Perpetual, a wealth manager.
“But it is also a growing source of risk due to the massive rise in leverage in the past seven
years, which makes it increasingly exposed to any rise in US interest rates or the stronger
US dollar. I can’t tell you any leverage boom in history that has ended well.”
© The Financial Times Ltd.