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Finance
 
INTERNATIONAL : AUSTRALIA: CONTINUED GROWTH
They call it The Kangaroo Trick
Despite The Recent Devastating Floods, Australia’s Expansion is forecasted to Strengthen over The Next two years. In fact, The Country hasn’t seen a Recession since 1990. So, what makes Australia a Recession-free zone?
Issue Date - 21/07/2011
 
Only a dozen economies are bigger than Australia (in 2010 its GDP stood at $1.235 trillion; IMF data), and only six nations are richer than it in the world (it has a per capita GDP of $55,590, higher than that of countries like UK, Germany, Japan, US, et al). The country was ranked 2nd in the United Nations 2010 Human Development Index and 4th in Legatum’s 2010 Prosperity Index. And above all, while most of its counterparts have faced the fury of a financial tornado in the recent past, it’s the one that has avoided a recession since 1991. Well, that’s Australia for you today!

But then, the situation wasn’t always the same “Down Under”. Just 25 years ago the Australian economy was grappling with issues like high interest rates (during the ‘80s the minimum lending rate had reached 17%), negative growth (-1.6% in 1983), big budget deficits, et al, coupled with highly regulated financial system (read: protectionism). In fact, in 1985, Paul John Keating, the then Australian Treasurer (he was also the 24th Prime Minister of Australia, serving from 1991 to 1996) had declared if the country failed to reform it would become a banana republic. No doubt, barely five years later, the economy faced a nasty recession, but then, it was the last for this OECD nation. Since then Australia has grown at an average annual rate of 3.6%, well above the OECD average of 2.5%. What’s more? Despite the recent devastating floods, which has forced the Australian economy to contract 1.2% in Q1 2011 (it’s the sharpest fall in real GDP since the recession in 1991) Australia’s expansion is forecast to strengthen over the next two years. In fact, Moody’s Analytics maintains its full-year 2011 GDP growth forecast at 3.4% for Australia.

Many attribute Australia’s success to its opulence in minerals, which thriving Asian nations are hungry for. But then, the economy was standing tall and smiling wide when a financial crisis struck Asia in July 1997. Further, commodity exports have not always been in vogue. It was only in 2003 when minerals begin to garner big bucks for Australia (see chart), but by then the economy had escaped both the Asian crisis as well as the financial cyclone that hit America in 2001. In 2007 came the global financial crisis, but that too failed to drag down the Australian economy. So, what is it that makes Australia a recession-free zone?

No doubt, to some extent, the country has been benefiting from a resources bonanza that brings it big money for doing nothing but extracting minerals and shipping them to Asia (and will continue to do so for a while as Asia’s appetite for minerals shows no signs of slowing), but then that’s surely not the thing that can be credited for the country’s economic success. Rather, it’s the series of well-thought reforms carried over a period of 20 years (between 1983 and 2003) that has made Australia one of the most prosperous and resilient economies in the world today.

 
In fact, it was the Prime Minister-Treasurer duo of Bob Hawke (PM) and Paul John Keating (Treasurer) that initiated the reform process in 1983 by floating the Australian dollar (allowing its value to fluctuate dependent on supply & demand on international money markets), deregulating the financial system, abolishing import quotas and cutting tariffs. The reforms were continued by Keating (when he took over as PM in 1991) and then by John Howard (after 1996). Result: By 2003, the effective rate of protection in the manufacturing sector had plunged to 5% from about 35% in 1970; sectors like shipping, telecom and aviation had been deregulated. While foreign banks were freely operating in the country, most of the state-owned firms had been privatised. A valued-added tax and a capital-gains tax had been brought in (in1985), and the double taxation of dividends was a thing of the past. Corporate and income taxes had both been slashed too, from 49% and 75% (top marginal tax rate) in 1986 to 30% and 45% respectively in 2011. Thus, these continued reforms from Australian policymakers have done much to transform the Australian economy than the recent boom in minerals trade, which started only post 2000.

However, despite two decades of continuous growth behind it and a booming market for its ores, Australia cannot afford to be at ease. Reason: The recent floods have tilted the risks to growth toward the downside. There is now concern that spending on mining & construction could be delayed and the investment upswing subdued. Even the Reserve Bank of Australia’s inflation-fighting credibility is now being questioned as markets continue to discount interest rate hikes. Agrees Matthew Circosta, the Sydney based Economist at Moody’s Analytics as he tells B&E, “Policymakers acknowledged for the first time in May 2011 that inflation could surpass the target band at 3.25% in December 2013. The central bank has little room to move on the inflation target and may find it hard to tame inflation expectations given the subdued interest rate outlook.” Further, considering that the recent floods have caused a major dent in the Australian economy, the biggest in the last 20 years, Australian policymakers certainly need to be more cautious than ever, as most of this can be attributed to Australia’s rising dependence on mining profits over the last few years (mining profits, which accounts for 30% of all company profits in Australia, were up 34% in 2010 over 2009, while non-mining profits rose just 0.4%).

Although this contraction will prove temporary, it surely leaves behind a burning question: Does Australia really have a golden future? It does, provided it fortifies the reasons due to which it has succeeded for so long. So, what is needed to get the financial alchemy going? Focus on aligning tax rates to further liberal levels, ensuring that inflation rates don’t cross the target band, at the same time, using the recent floods to jump start pockets of the economy by using the Marxian trick of indulging in increased capital expenditure in infrastructure! And of course, they need to start playing better cricket. Or maybe not... Finally, we are an Indian magazine.

Manish K. Pandey           

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