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2016-09-06 09:42:28
Australia has weathered the China slowdown and commodities slump well. What has
it done right?
Sep 3rd 2016 | SYDNEY
THE last time Australia was in recession, Mikhail Gorbachev led the Soviet
Union and Donald Trump had filed for Chapter 11 only once. Barring unforeseen
catastrophe, late next year Australia will pass the Netherlands modern record
of 26 years of consecutive growth despite the slowdown of its biggest trading
partner, China. Unlike most of the rich world, it sailed through the global
financial crisis, and unlike most commodity exporters, it has weathered the
raw-materials price slump. Its GDP growth rate of 3.1% dwarfs that of America
and the euro zone.
Australia is often called the lucky country , and luck, particularly in
geology and geography, has played a part in its success. But it has deftly
played both sides of the China boom: the surging demand for raw-material
imports while that lasted; more recently, the desire of the Chinese
middle-class to eat well, travel and educate their children in English. Yet
every silver lining has a cloud. Not only does Australia have one of the most
expensive housing markets in the world, it remains overexposed to the fortunes
of China.
The story of Australia s success starts with what its government did not do:
spend beyond its means. Tight budgets in the late 1990s and early 2000s,
combined with improving terms of trade, meant that when the financial crisis
hit, the government was running budget surpluses (though the country as a whole
has a long-running current-account deficit). It could thus afford stimulus
packages in late 2008 and early 2009 worth more than A$56.6 billion ($42.8
billion). Only China provided greater stimulus as a share of GDP.
Australia was then in the middle of the biggest mining boom in its history,
stemming from increased demand in China. In the decade to 2012, the value of
its mined exports tripled; mining investment rose from 2% of GDP to 8%. From
January 2003 to February 2011 the price of iron ore, which these days comprises
17% of Australia s exports by value, rose from $13.8 to $187.2 a tonne.
Australian thermal coal, which accounts for 12% of its exports, rose from $26.7
to $141.9 (down from a peak in 2008 of $192.9).
The Reserve Bank of Australia (RBA) estimates that, during that period, mining
raised real disposable household income by 13% and wages by 6%, boosting
domestic purchasing power. Saul Eslake, an independent economist, argues that
except for the Chinese people, no country derived more benefit from the growth
and industrialisation of China than Australia. The value of the Australian
dollar also rose, which dented non-mining exports. But since demand from Asia
kept prices high for Australia s agricultural commodities (such as beef and
wheat), and because it exports relatively few manufactured goods, the damage
was contained.
As China rebalanced and commodity prices tumbled, other exporters such as
Russia, South Africa and Brazil fell into recession. In Australia, although
business investment has fallen sharply, GDP growth remains near its 25-year
average of 3% (and as a side benefit, the commodity-price fall quelled rising
inflation).
For that, thank two factors. First, the rise in mining investment during the
fat years led to increased production. Commodity exports have continued to grow
(albeit modestly and less profitably). Though prices of iron ore and coal are
well below the past decade s peaks, they remain above pre-boom levels.
More important, Australia let the dollar depreciate, which made its exports
more appealing. Today Australia benefits from a growing number of Chinese
consumers, who buy Australian food products that are widely seen as safer than
their home-grown equivalents.
Middle-class Asian students have been flocking for English-language education
to Australian universities, which are closer and cheaper than their American
and British counterparts. Between June 2015 and June 2016 the number of
international students enrolled in Australian colleges and universities rose by
11%, and the number of international visitors rose by 13.7%. Today education
and tourism together account for 14% of Australia s export value. Graduates are
eligible to work for up to four years, and some stay longer, giving Australia a
relatively young, well-educated, multicultural workforce.
Those workers will need places to live, which has helped increase house
construction. According to Paul Bloxham, the chief Australia and New Zealand
economist at HSBC, Australian builders completed almost 200,000 new dwellings
last year, and will probably do the same this year and next. Construction has
absorbed some of the employment losses as mining investment has waned (building
a mine requires more people than running one).
Yet that has failed to stop an alarming rise in house prices, particularly on
Australia s east coast. In 2015 the median house price in Sydney was 12.2 times
the median income, up from 9.8 in 2014. Melbourne s multiple rose from 8.7 to
9.7 in that period. Some argue that house prices have peaked, and that as
residential construction continues prices will moderate (except perhaps in
central Sydney). But if prices collapse, that could not just harm Australia s
otherwise healthy banks, but also dampen domestic consumption for years.
Some argue that government debt, which has hit a record 36.8% of GDP, up from a
low of 9.7% in 2007, is another worry, because it provides less policy room to
deal with the next crisis. It remains lower than in most developed countries.
But given the risks of a housing bust or deeper slowdown in China, such worries
reflect a healthy lack of complacency. After all, one day the luck will run
out.