Australia, a country of approximately 24 million people in 2016, was one of the only countries in the developed world that avoided recession in the late 2000s decade. As many of the world’s largest economies slipped into recession from the global financial crisis fallout (GFC), Australia remained surprisingly resilient. At the time the GFC hit in late 2007, Australia had remarkable financial health. The country was debt-free, growing strongly, experienced running surplus budgets and had favorable terms of trade thanks to China’s insatiable demand for its wealth of commodities such as iron ore. Australia’s prime minister during the GFC, Kevin Rudd, unleashed a $42 billion stimulus package that included paying every Australian worker earning AUD$100,000 ($72,229) or less an AUD$950 ($686.18) one-time payment to encourage spending back into the economy.
An alternative reason for Australia’s recession avoidance is the lack of competition that local companies generally enjoy. The nation has only four banks that dominate the financial landscape and one telecommunications company that controls the majority of communications infrastructure. This allows for margins, fees and products to be protected from cutthroat competition that generally faces companies in the United States and Europe. Lack of competition may have contributed to Australia not entering recession by allowing companies to continue to grow, but possibly at the detriment of the unwitting consumer.
External Growth
Australia’s strong reliance exporting its commodities leaves it heavily dependent on the economies of its largest trading partners, which are China and Japan as of 2016. China’s deceleration in economic growth has been well documented. Economic activity in Japan looks to remain uncertain for the foreseeable future as the consequences of ultra-dovish monetary policy play out. Australia is likely to experience continued external headwinds from its two largest trading partners in 2016 that are likely to pressure economic growth.
Internal Growth
In 2015, Australia’s annual gross domestic product (GDP) was 2.3%, slightly below the world average of 2.6%. The nation’s 2016 GDP target range is between 2% and 2.5%, in line with the world average. Employment has been mixed, with the national unemployment rate at 5.7% as of April 2016. Offshore demand for commodities is likely to remain soft in 2016, with investment in the mining sector likely to continue slowing. This may have a knock-on effect on other sectors of the Australian economy that leads to conservative spending during the transitioning from reliance on the mining investment boom.
Australia is in an accommodative monetary policy environment. The Reserve Bank of Australia (RBA) surprised many economists by cutting the nation’s official cash rate to a record-low 1.75% in its May 3, 2016, meeting due to deflationary concerns. Australia has a 2016 inflation outlook between 2% and 2.5%. Easing monetary conditions has led to an increase in household spending, which is Australia’s most important driver of growth. There are concerns, however, that the reliance on households and housing for growth is creating excessive household leverage and house prices that may not be sustainable. Sydney and Melbourne, Australia’s two most populous cities, have house price-to-income ratios of 12.2 and 9.7 times, respectively. Although interest rates are likely to remain low for the foreseeable future, a generation of Australians is likely to be exposed financially when interest rates do eventually begin to increase, as Australian banks and lenders do not offer mortgages with a fixed-term period longer than 10 years. This has the potential for significant ramifications through the entire economy that may stifle long-term growth in Australia.
The Bottom Line
Australia is attempting to rebalance its economy, reducing reliance on the mining sector. The RBA surprise interest rate cut in May 2016 was intended to fight deflation and put downward pressure on the Australian dollar. A lower Australian dollar encourages consumers to spend domestically and also encourages exports, which helps create growth. An accommodative interest rate environment is spurring household spending, although elevated housing prices remain a concern. Growth in Australia is likely to remain modest in 2016.
