The australian test cricket team's record unbeaten run ended last week when India pulled off a miracle at Eden Gardens in Calcutta. But the long faces in Australia are due to an outbreak of economic neurosis rather than sagging sporting pride. The "miracle" economy's terrific streak is out of puff: output fell by 0.6% in the three months to last December (the first negative drop in quarterly GDP in almost a decade); unemployment is starting to rise; the dollar is trading below US50 cents; shoppers and business people are spending more cautiously. Ergo, the newspaper headlines are grim, the panic merchants are having a field day and the sunny days are getting shorter.
But there is life in the Australian economy. The $A is clearly out of favor at the moment; whether it is due to traders seeking a safe haven in $US securities, a reflection of where commodity prices are heading as world growth slows or a vote of no-confidence in government economic management depends on who is giving the answers. Amid financial market, political, bureaucratic and media self-interest, Time offers a sobering guide to an uncertain outlook.
What shape is the Australian economy in?
Last November Prime Minister John Howard boasted about national prosperity: "We have the best unemployment figures for 10 years. We have high rates of investment. We have low inflation, lower interest rates. We've got a high productivity economy and we've just come through an experience with the Olympic Games and the Paralympics where the rest of the world thinks we're fantastic." One negative quarter is no reason to be gloomy, unless you're a confirmed pessimist. Up until the past decade, the odd negative quarter in good times was common. Talk of a recession is probably overblown (and besides, the crude technical definition of two consecutive quarters of falling GDP is outdated).
Far better to look at the likelihood of a sustained drop in the level of GDP, a sharp rise in unemployment and many businesses going to the wall. So far, that has not happened. The culprit for Australia's slowdown has been a slump in home building. Before the introduction last July of the Goods and Services Tax, people rushed to get new homes built; it boosted the economy in the first half of 2000, but the transition to a GST also caused a record slump in construction over the remainder of the year.
Despite the fall in the $A, Australia's economic "fundamentals" appear sound: low inflation, low interest rates, an improving current account deficit and, by world standards, low levels of government debt. Treasurer Peter Costello claims this is evidence of "considerable strength in the Australian economy." Structural health, sure. But the business cycle has turned down. As well, the productivity growth in the economy is likely to continue, based on investment in information technology and 15 years of policy reforms that have improved economic efficiency across most industries.
How vulnerable is Australia?
These days, the Australian economy is quite open to international trade. In the mid-1970s, the value of exports and imports was about 25% of GDP; today trade makes up 45% of the economy. Global growth was almost 5% last year; in 2001, it is expected to fall to around 3% (and economists could trim back that forecast). That makes it a hard climate for Australian companies to sell into, especially traditional markets such as the U.S. and Japan. But these days, about 35% of exports go to East Asian countries other than Japan (such as Korea, Taiwan, Malaysia and Singapore) that have bounced back strongly from the Asian economic crisis.
In some important ways, the Australian economy is stronger than the U.S.; Australia is in a superior position to adjust to financial hardship. For instance, according to the Reserve Bank of Australia, credit to business is much tighter in America; the local sharemarket, particularly in technology stocks, grew more modestly than in the U.S. during the boom years and so any fall in value should be less severe; in general, the appreciation in asset prices has been less pronounced in Australia (unlike the experience of the previous recession); with business investment actually declining since the late 1990s in Australia, it is unlikely to experience the problems of spare industrial capacity (from empty factories to unplugged computers) that could become a feature of the weakening U.S. economy.
Is the low $A a problem?
Against the greenback, the $A is almost 30% below its 1990s average of US70 cents (and about 14% below its value when measured against a basket of its trading partners' currencies). In the wider economic picture (as opposed to its effect on national virility), whether the $A is slightly above or slightly below US50 cents is meaningless. According to Macquarie Bank's New York interest-rate strategist Rory Robertson, last year a weak $A was "public enemy number 1" when strong economic growth increased the risk of inflation. Now that the focus has shifted, "the weak $A is Australia's new best friend," Robertson said.
There are winners and losers, swings and roundabouts, in any exchange rate fall. Exporters are more competitive on price; their receipts in foreign currency are worth more in $A terms. For instance, BHP estimates its revenues swell by $A46 million for every 1 cent fall in the $A against the greenback. Imports become more expensive, helping local manufacturers to compete. Petrol is dearer, as are many other inputs (such as paper for magazines and chemicals for factories). Retailers of foreign-made products (cars, TVs, computers) can see their profit margins squeezed. Farmers and businesses who need to replace or update foreign-made capital equipment will see their costs rise. That trip to Disneyland is likely to be put on hold.
But exchange rates are relative, not absolute: an Aussie dollar still gets you 100 cents. In Sydney, a McDonalds Big Mac costs $A3 (or $US1.48 at current rates); in New York, the burger would set you back $US3.09. On this simple application of Burgernomics, to use the clever idea devised by The Economist to explain foreign-exchange rates and local purchasing power, the $A is undervalued by more than 50%. Again, that's great news for American tourists who chomp burgers and stay in luxury hotels-and to Australian exporters of beef.
What can policy makers do?
Two decades of economic reform have made Australia more fleet of foot, while the speed of the game now is faster and more volatile. Policymakers can't afford to stray from the course that earned them such high praise when the Asian region was in trouble. Although it is not in crisis, the downturn in the Australian economy has put intense political pressure on Howard's government. Saturday's 10% swing against him in the Ryan by-election will reinforce the view that the Coalition is in a panic. Winging it on policy (like on petrol excise, taxing trusts and the Business Activity Statement) harms Howard's economic reputation.
The smart money factors in a political risk not because of what is being said by governments (or oppositions), but on what they actually do. The May Budget is likely to include measures to promote consumer spending. Treasury officials believe fiscal policy has already been loosened considerably-and will urge the federal government to be careful with the Budget surplus. Low interest rates are also geared to expanding the economy. If the U.S. Federal Reserve cuts interest rates, expect the RBA to do the same.
How bad will things get?
Take out housing, and GDP would have grown in the December quarter. Most analysts say the housing industry is on the mend; the doubling of the First Home Buyers subsidy for new homes will help the construction industry. Employment is still growing-albeit modestly-and the boost to national income should lead to a rise in GDP in the March quarter. Inflation appears under control: wages aren't growing and consumer prices are in check (and don't be surprised to see more "bargain" sales).
Last year was cheery and abundant: a strong economy, Sydney's Olympics and politicians were not in your face. Money will seem tighter but, importantly, the worst of the job lay-offs are probably behind us. Still, Australia can't control the major factor that clouds the picture for all medium-sized trading nations in the region. As one senior government economist told Time last week, "if the U.S. economy turns really bad, every Asia-Pacific country will follow."