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, a housing market boom, 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 mid-2008. Tight global liquidity has had an impact on Australia’s banking sector, which relies heavily on international wholesale markets for funding. The economy remains relatively healthy despite falling export commodity prices. The government plans to counter slowing growth in 2009 through a fiscal stimulus package.
Economic Policy over 12 Months
While Australia has enjoyed a long, sustained period of growth thanks to sound macroeconomic policies, the surge in commodities prices during 2007 and much of 2008 rekindled broad-based inflation pressures, with the CPI index rising to 4.5%, according to the IMF. At the same time, the country’s growing current account deficit increased net foreign liabilities to 60% of GDP. In response, the Reserve Bank of Australia tightened monetary policy, raising the rate by 1% between August 2007 and March 2008. The unwinding of the yen/Australian dollar carry trade contributed sharply to the sudden weakening of the Australian dollar in August 2007 and to its continued depreciation during the second half of 2008. The carry trade involves investors borrowing yen to finance rolling 90-day investments in Australian dollars (as well as in New Zealand and US dollars). This generated substantial profits and fueled strong demand for the Australian dollar, already strengthening as a result of the commodity price boom. As the Australian dollar further appreciated against the yen, the carry trade generated further profits for investors. In 2007 these positions began to unwind through a combination of market volatility, the liquidity crunch, and sharp exchange-rate movements. Investors sold out of the dollar and repaid their yen debts because the accelerating depreciation of the Australian dollar either rendered the trade unprofitable or generated a momentum that would have led to losses if the position was maintained, according to Chris Ryan, head of the international department at the Reserve Bank of Australia.
The last quarter of 2008 was also remarkable for seeing a very sharp downward shift to below-trend growth in the forecasts for Australia’s trading partners. Japan is Australia’s major trading partner and it saw a 20% decline in manufacturing output in the last quarter of 2008, along with weak performances from Australia’s other major trading partners.
Against this backdrop, the Australian government’s budget for 2008–2009, set at a time when robust growth was still being predicted for the emerging markets of China and India (both of which have since seen a substantial slowdown), anticipated nominal economic growth of 9.25%. The budget set a target for a surplus of AU$21.7 billion, or 1.8% of GDP, the largest budget surplus for over a decade, to be achieved by “disciplined” spending and the lowest real increase in government spending in a decade. The anticipated surplus has since been revised in the light of the steep global downturn, and in its update to its Mid-year Economic and Fiscal Outlook, the Australian government said it now expects to run a deficit of AU$22.5 billion for the year, as it increases spending to support growth and jobs.
The government remains committed to reducing personal income tax by AU$47 billion over four years, with the cuts being targeted at low and middle-income families. The country’s medium-term fiscal objectives remain to achieve budget surpluses, on average over the economic cycle (even allowing for budget deficits to pay for stimulus packages during the downturn); to keep taxation as a share of GDP below the level for 2007–08, and to improve the government’s net worth over the medium term.
Economic Performance over 12 Months
In the second half of 2008, the Australian government responded to the threat of zero growth or an actual contraction of the economy by announcing a AU$42 billion “Nation Building and Jobs Plan” to stimulate the creation of 90,000 jobs and to ensure positive growth. It expects the plan to enable the economy to achieve 1% year-on-year growth during 2008–2009, and 0.75% growth for 2009–2010. Unemployment is forecast to rise to 7% by June 2010. Australia still expects to be in a much better position than the advanced economies of the members of the G7, with its anticipated budget deficits for 2009 and 2010 being under 3% of GDP, as against the G7 average of 7%, as forecast by the IMF (assuming the global downturn does not worsen). Weak demand from China and Japan has already had an impact on Australia’s exports, and, by February 2009, the Australian dollar had lost between 30% and 40% of its value against the US dollar. Slumping equity values have lowered the market capitalization of many major Australian companies by as much as 80% (source: The Australian Business), and sparked a buying spree of Australian assets by Chinese companies in particular.
The government has followed the example of other countries by guaranteeing bank deposits, and has looked to shore up the Australian construction and commercial property sector—one of the key drivers of Australia’s growth strategy over the last decade—by providing liquidity support to “viable major commercial property projects.” This is being done through a new body, the Australian Business Investment Partnership, capitalized at AU$4 billion (in equal measures by the government and participating banks). It will support projects such as shopping malls, commercial offices, and factories under construction. The package aims to safeguard around 50,000 jobs in the construction sector, which analysts argue were under threat, out of a total construction sector workforce of 150,000.
In February 2009, the Australian Reserve Bank cut its rate by 1%, and the cut was passed on to businesses as a reduction in the cost of debt funding. This comes on top of a AU$2.7 billion business tax break targeted at small to medium-sized businesses (part of the AU$42 billion “Nation Building and Jobs Plan.” 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 ten 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: 1300 363 263), from the Australian Trade Commission, or the Department of Foreign Affairs and Trade.
Tax Exemptions
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 (www.ausindustry.gov.au).
Statistics
GDP growth: 1% (2008–2009, government est.)
GDP per capita: AU$39,300
CPI: 4.7% (2008 est.)
Key interest rate: 10.02% (December 31, 2007)
Exchange rate versus dollar: 1.2059 AU$ to the dollar (2008)
Unemployment: 4.5% (government, estimated to rise to 7% by 2010)
FDI: AU$333.1 billion
Current account deficit/surplus: 22% of GDP (government)
Population: 21,007,319 (July 2008)
Source: CIA World Factbook except where stated
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