Economy and Trade
Australia has a strong economy with a per capita GDP that is comparable to that of the United Kingdom, France, and Germany. Low inflation, and an active program of developing export ties with Asia, and particularly with Japan and China, have been key factors in promoting 17 years of continuous growth for the country’s economy. Robust business and consumer confidence and high export prices for raw materials and agricultural products fueled the economy in recent years, particularly in mining states. The country’s big challenge recently—apart from the global downturn starting in late 2008—has been dealing with a growing trade deficit caused by a combination of droughts, which weakened agricultural exports, strong demand for imports from Australian consumers, and a strong currency which, again, attracted imports. The unprecedented global demand for commodities exposed infrastructure bottlenecks, and a tight labor market constrained growth in export volumes and caused inflation to rise during the middle of 2008. Tight global liquidity has had an impact on Australia’s banking sector, which relies heavily on international wholesale markets for funding. However, the economy emerged relatively unscathed from the global downturn and there are signs in 2010 that the macroeconomic outlook is improving steadily.
Economic Policy over 12 Months
The fact that the downturn in Australia has been milder than in most other advanced economies can be attributed to a number of factors. These include still strong commodity exports, a flexible exchange rate, a healthy banking sector, and significant fiscal and monetary stimulus. Growing economic ties with Asia and, in particular, China was the key factor underpinning commodity exports. This development suggests that Australia’s economic cycle is now more linked with the Asia-Pacific economies than with the OECD. China has become Australia’s biggest trading partner and China’s robust growth appetite for Australian resources in 2009 was a key support for the Australian economy.
The central bank was one of the first in the world to raise interest rates in the current economic cycle, a sign of the resilience of the Australian economy in the face of the global downturn. The Reserve Bank of Australia raised interest rates by 25 basis points in October 2009 to 3.25%. By March 2010, the benchmark interest rate had increased to 4%. The central bank expects the economy to expand by 3.25% in 2010, a figure that may well prove conservative, and it is anxious to contain inflationary pressures. Indeed, economic data since the start of March 2010 has been generally strong, leading some analysts to suggest that the Australian economy is already growing at or above its trend rate.
Lax fiscal policy certainly helped to support the economy in 2009. Prudent macroeconomic policies meant that Australia entered the downturn with low levels of public debt and therefore was well placed to boost public spending. The fiscal boost amounted to 0.8% of GDP in 2008, 2.9% of GDP in 2009, and 2% of GDP in 2010.
Australia’s banks were healthy at the outset of the financial turmoil—which began in the middle of 2007 in the US mortgage market and quickly spread to other sectors and other advanced economies—and the institutions continue to be resilient to the global crisis. Australian banks did have sizable external debt obligations and there was a risk that this debt would become more difficult to roll over. Wholesale funding accounts for about 50% of total funding at Australian banks, and access to offshore wholesale markets was disrupted by the collapse of Lehman Brothers in September 2008. However, the establishment of deposit and wholesale funding guarantees by the Australian government in October 2008, and central bank actions to provide sufficient liquidity, helped maintain confidence in the financial sector. A conservative approach by regulators and supervisors meant that banks had relatively low leverage and high capital adequacy ratios going into the crisis.
Economic Performance over 12 Months
The Australian economy fared much better than most other advanced economies in 2009, avoiding recession. Indeed, GDP grew by 1.3% in 2009, down from 2.5% in 2008 and 4.1% in 2007. However, by February 2010 Australia was one of the few advanced economies where the economy was larger than it had been before the global financial crisis.
A revival in Australia’s labor market, robust consumer confidence, historically low interest rates, and a buoyant housing sector supported retail sales, which account for 23% of GDP, in 2009. However, retail sales suffered their biggest fall in a year in February 2010—declining by 1.4%—as higher interest rates ate into consumers’ spending power.
The global financial crisis has had an impact on the country’s fiscal position. Stock market losses caused by the global financial crisis have affected income, company, and superannuation tax revenues. The government consequently expects to register a record budget deficit in 2009–10 equivalent to 4.7% of GDP, and another large deficit in 2010–11 of around 3.6% of GDP. However, it anticipates a return to budget surplus in 2015–16. Government finances are in better shape than had been feared. Lower-than-anticipated unemployment, better-than-expected economic growth, and a surge in company profits are likely to deliver significant improvements in tax collections.
In addition, public debt in general remains low. According to the Mid-Year Economic and Fiscal Outlook (2009–10), released in November 2009 by the Australian authorities, government net debt is expected to peak in 2013 at 10.0% of GDP—a modest level compared with the government indebtedness/GDP ratios of the United States, Japan, the United Kingdom, and many other developed economies.
The Australian government has recognized that transport infrastructure problems across the country are having an impact on Australia’s ability to respond to surges in demand for commodity exports, and has set up a national infrastructure fund to address these issues. Australia’s largest source of imports is the United States, which accounts for some 15% of total imports (AU$33 billion in 2006, according to the Australian government), followed by China (13%), and Japan (9%). Australia is actively pursuing free trade agreements and has finalized comprehensive agreements with four of its 10 largest trading partners, New Zealand, Singapore, the United States, and Thailand, and negotiations are underway with the Association of Southeast Asian Nations, China, the Gulf Cooperation Council, Malaysia, and Japan.
Support for Inward Investment and Imports
The first port of call for potential investors in Australia is Austrade, the Australian Trade Commission. As an open economy and a global trader, Australia is committed to liberalizing international trade and breaking down trade barriers. All goods entering Australia must be cleared by the Australian Customs Service, and the requirements are listed on its website: www.customs.gov.au. Further information is available from the Customs Information and Support Centre (tel: +61 2 6275 6666), from the Australian Trade Commission, or the Department of Foreign Affairs and Trade.
The Australian government agency AusIndustry operates a range of incentives to encourage inward investment that results in job creation in Australia. It is part of the Department of Innovation, Industry, Science and Research.
GDP growth: 1.3% (IMF, 2009)
GDP per capita: US$38,800 (2009 est.)
CPI: 1.9% (2009 est.)
Key interest rate: 4% (March 31, 2010)
Exchange rate versus US dollar: AU$1.2894 (2009)
Unemployment: 5.7% (2009 est.)
FDI: US$282.3 billion (December 31, 2009 est.)
Current account deficit/surplus: −US$33.31 billion (2009 est.)
Population: 21,515,754 (July 2010 est.)
Source: CIA World Factbook except where stated