Australia’s economic miracle

SYDNEY, Australia — This time, inhabitants of the "lucky country" weren’t taking their extraordinary good run of economic fortune for granted.

The entire country, it seemed, sweated collectively in the lead-up to the release of the official GDP figure on Sept. 2. When it finally came out, the collective sigh of relief was almost audible as it confirmed a minor miracle: that Australia was the only industrialized country to have dodged the global recession.

In the final quarter of 2008, Australia’s economy narrowly contracted. Since then, however, the country has recorded two positive (if anemic) quarters of economic growth — 0.6 percent between April and June, following a 0.4 percent increase between January and March — thus avoiding the feared two consecutive quarters of negative economic growth that define a recession. Unemployment, though edging upwards, is a respectable 5.8 percent.

By contrast, the U.S. continues to languish in negative growth territory for the fourth consecutive quarter. Unemployment is 9.7 percent with hundreds of thousands of jobs still hemorrhaging each month. Why has Australia proved so resilient? Part of the story, say experts, is its status as the “lucky country” — a function of its sunny climate, geographic detachment from the world’s troublespots and, most of all, its abundant natural resources. Over the past decade, Chinese demand for Australian commodities — particularly coal and iron ore — has helped bring unprecedented bounties to local coffers.

Yet even since the global recession, China has continued to treat Australia as its quarry. Its strategy involves the import of raw materials, taking advantage of low commodity prices, for an ambitious construction program of roads, railways, ports and new housing.

As Tony Morriss, senior strategist for ANZ Bank, told GlobalPost: “China being a Communist country has flooded their economy with stimulus and it’s been very effective. The demand for our raw materials has had an immediate effect.”

In the first quarter of 2009, China bought a record quantity of Australian iron ore. This caused Australia’s overall export volume to rise even though demand from Australia’s other trading partners collapsed. Australia’s luck was its strength in commodities — this gave it an advantage over manufacturing economies Germany and Japan which suffered craters in demand for their cars and electrical goods.

According to Morriss: “Because of our interrelationship, China and Australia have come out of this global financial crisis better than anyone else.”

Yet Australia’s resilience is as much a product of good management as good luck. Its banks are subject to much tighter prudential supervision and transparency requirements than their U.S. counterparts. Of the 11 international banks with an AA credit rating, four of them are Australian. And by and large, Australian banks avoided trading toxic subprime mortgage securities — a dangerous game that crippled overseas balance sheets.

Annette Beacher, senior strategist for TD Securities, told GlobalPost: “The flow of credit is obviously what caused this crisis in the first place, and that’s why Australia’s banks held up so much better.”

Australia’s fiscal management has also generally been more responsible. Last year, the Labor government, taking advantage of the budget surpluses bequeathed by its predecessor, announced an ambitious fiscal stimulus to firewall the economy. It doled out two tranches of cash handouts (including 900 Australian dollars — or about $770) for every taxpayer below a certain income threshold) and provided incentives for first-home buyers and capital works programs at public schools.

The "cash splash" was wildly popular yet also attracted controversy. The opposition party derided it as an irresponsible short-term "sugar hit."

A law professor named Bryan Pape launched an action in the nation’s highest court, claiming the giveaway was unconstitutional. But the case was thrown out, to the relief of millions of Australians who had been busy fantasizing about ways to spend the money.

In addition to its intended targets, the handout was gratefully received by Australians living abroad, some who had renounced their citizenship and even thousands of deceased. Yet overall, according to Beacher, the handout succeeded in propping up domestic demand. “The government’s cash handouts were targeted towards people who would spend them," he said. "That has certainly made retail sales a billion dollars a month more than they would otherwise be … it was about getting money into people’s pockets.”

Likewise, the school capital works program, though not without its examples of maladministration, was designed to provide an immediate booster shot to the construction sector. This contrasts with the stimulus enacted in the U.S. which has been criticized for a shortage of "shovel-ready" projects and dribbling out most of its funds post-2009. "You can’t afford to wait for long term infrastructure investment, it takes too long to get off the ground," the ANZ’s Morriss said.

Monetary policy is the other factor that has helped Australia weather economic turmoil. In recent years, the Reserve Bank of Australia, equivalent to the U.S. Federal Reserve, has eased cash interest rates from 7.25 percent to 3 percent, a 49-year low.

This has provided relief, and cushioned consumption, for millions of families struggling to pay their mortgage. In the U.S., of course, the cash interest rate is zero. Yet, there, a far lower proportion of home loan mortgages take their cue from the cash rate, and in fact, fixed mortgage rates are on the rise.

In his recent (and only modestly successful) film epic, "Australia," director Baz Luhrmann was castigated for borrowing the song “Somewhere Over the Rainbow” from The Wizard of Oz. Far from immune from the global headwinds, Australia is no paradise, no Kansas. Yet, for those experiencing the misery of recession, there are worse places to dream of clicking one’s heels and calling home.