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Evidence mounts on economic rebound

Australia has not been spared by the worldwide recession. But the country has managed to navigate through the nasty global currents much better than most other economies. Recently evidence has been mounting that the economy is rebounding. Better than expected housing, retail and confidence numbers have many businesses conclude that the worst did not occur and that conditions are indeed improving.

Reserve Bank of Australia Governor Glenn Stevens said in early August the economy may recover sooner than he forecast six months ago. Of course, the lowest interest rates in half a century - as well as a three stage stimulus package by the Australian government - have clearly contributed to boost consumer and business confidence. Prime Minister Kevin Rudd´s government has distributed A$12 billion in cash handouts to households in 2009, and is spending A$22 billion to upgrade the public infrastructure.

Retail sales jumped 2% in the second quarter from the previous one. This was the biggest rise in almost two years. These are healthy gains, taking into account that retail sales account for as much as 25% of gross domestic product. Spending by private households helped Australia´s economy avoid a recession after GDP rose 0.4% in the first quarter from the previous three months when it contracted 0.6%.

The country´s manufacturing sector is displaying signs of recovery as well. The performance of manufacturing index published by the Australian Industry Group and PricewaterhouseCoopers rose to a 10-month high in July. Manufacturing contracted in July at the slowest pace since September 2008, more proof that government spending and the lowest borrowing costs in 50 years are supporting demand.

Another economic measure signaling a rebound is the index of the weighted average of prices for established houses in eight capital cities. It climbed 4.2% from the first quarter, significantly exceeding forecasts. Additional tailwind for the economy comes from the strong growth rebound in China, Australia´s second-biggest export market. Massive Chinese stockpiling of major commodities like iron ore and copper has spurred forecasts for higher prices of commodities, Australia´s main exports. In June, Australia´s trade deficit unexpectedly narrowed on rising exports, including gold. The trade gap shrank to A$441 million from a revised A$ 737 million in May, according to the Bureau of Statistics.

In late June, the International Monetary Fund (IMF) upgraded its 2009 outlook for the Australian economy, forecasting the country´s GDP to contract 0.5%. In April the IMF forecast a 1.4% contraction. Amid the encouraging news and with the lift from improving commodity prices and the Reserve Bank signaling its next move will be to increase borrowing costs, the Australian dollar strengthened to the highest against the Greenback since September in early August. However, the exit from the deep global recession won´t be easy. Treasurer Wayne Swan cautioned last week that Australia still had “a long way to go” before the economy recovers. The remaining risk is highlighted by the latest retail sales for the month of June. They unexpectedly fell for the first time in four months because households spent less on clothing and at department stores.

Reserve Bank upbeat on outlook

RBA Governor Glenn Stevens is convinced that Australia´s current economic downturn won´t be as severe as some had expected, nor will it be one of the worst in the postwar period. Mr. Stevens´ hint in early August that there is no rule preventing the RBA from raising interest rates before unemployment peaks speaks volumes about the upbeat assessment of the economy. The Governor´s remarks spurred speculation Australia will increase borrowing costs faster than most other nations. In order to combat the global downturn, official interest rates were slashed by a record 425 basis points between September of 2008 and April 2009.

On August 4, the RBA kept its benchmark rate at 3%. Mr. Stevens- in a statement accompanying the announcement – dropped expressions used in the two preceding months to having “some scope for further easing of monetary policy”. Observers widely perceived the latest remarks as a shift reflecting concerns that the recent rate cuts – if left in place for too long – could inflate a housing bubble which might destabilize the economy.

Favorable economic structure

According to the Department of Foreign Affairs and Trade, Australia has recorded 17 consecutive years of economic growth since 1992, averaging 3.3% a year. The country ranks first in the Asia-Pacific region for labor, agricultural and industrial productivity per person employed. The 2006 OECD survey noted that living standards in Australia surpass those of all Group of Eight countries except the United States. On top of that a series of budget surpluses have allowed the government to retire large amounts of government debt. The Foreign Affairs Department´s website states that “net government debt was eliminated in 2005-06 making Australia a net creditor nation. In May 2008, the Australian Government committed to a budget surplus equivalent to 1.8% of GDP – some $21.7 billion”.

But then came the global recession, a massive stimulus package and a reduction in public revenues. Australian government debt is now expected to rise significantly in the coming year because the government aggressively combats the global financial crisis. Since late 2008, Australia´s government has implemented one of the most aggressive fiscal stimulus packages in the world - including A$20 billion in direct consumer payments, home buyer assistance, investment incentives, income tax cuts and ambitious infrastructure plans.

In May, the government forecast its largest budget deficit on record with A$57.6 billion for the fiscal year 2009-10, which is equivalent to 4.9% of GDP.

Good marks from the IMF

Source: http://www.imf.org/external/np/ms/2009/062309a.htm

On June 23, the IMF upgraded the Australian economic outlook, projecting the country´s GDP to rise by 1.5% in 2010, even though – according to the Fund – the “near-term outlook remains weak” and the “recovery will likely be slow”. In its outlook report published as part of regular consultations under Article IV of the IMF´s Articles of Agreement, the Fund gives Australia a series of good marks, especially for its fiscal and monetary policies as well as for the state of its financial sector.

On the downside of its risk assessment for Australia, the IMF sees the possibility that the world economy could take longer to recover, with “significant spillovers through commodity sector incomes”. But in case the outlook for growth and inflation should weaken, the RBA, according to the IMF, has “scope to reduce the cash rate further”. On the fiscal side the IMF welcomed “the quick implementation of targeted and temporary stimulus”.

This stimulus was summarized by Treasurer Wayne Swan on July 31^st as follows: “Starting last year the Australian Government has responded with a three stage stimulus package. The first phase took the form of temporary and targeted income support to the most cash-constrained people in the country. The second phase is aimed at infrastructure investments, with a focus on upgrading our schools, homes and communities. And the third phase of the stimulus package is targeted at larger and longer term nation building infrastructure”.

According to the IMF, there is scope for further fiscal stimulus if the outlook for growth weakens. With regard to Australia´s financial sector the IMF states that the country´s “banking sector entered the financial crisis in a healthy position”, mentioning that the banks maintained their AA credit ratings and raised equity during the turmoil. The IMF´s recommendation for Australia´s banks is – in the face of remaining vulnerabilities – that they “continue to manage their short-term offshore liabilities that represent a significant share of their funding”.