Contagion

From my research there appears to be a recurring theme that could lead to Australia’s downfall and it is an important problem in any financial crises, contagion.

Australia has put all its ‘eggs in China’s basket’ and relies heavily on it for industry and investment. If demand from China falls Australia will greatly feel the effects especially in the resource industries such as mining, however I think maintaining such a close relationship with China has put Australia in a better position than one with say the US or Europe.

There is a high risk of contagion between the property bubble and banking. Housing prices have increased by approximately 300% over the last 10 years, the same increase Ireland saw from 1992 to 2006! The threat of the bubble bursting seems to be looming over Australia and depending if it makes a big bang or if it slowly deflates there will be wide-ranging effects on banking and its economy.

What does this mean for the future of Australia? I think it is essential for Australia’s banks to take the threat of the property bubble seriously, paying close attention to the risks involved and how best to endure the inevitable bursting of the bubble. Australia may suffer a similar outcome to that of Ireland’s housing bubble although I doubt the consequences will be quite as bad. A lot may depend on what is happening in other countries and if it will spread to Australia through panic and lack of confidence by consumers. The RBA however appear not to be panicking, interest rates have been steady at 4.25% during the start of 2012 sending a positive picture of the economy, but this confidence may be misplaced according to many economists who expected interest rates to be reduced. Even with the possibility of a crisis ahead is Australia still a better place to live? Well with an unemployment rate of 5.1% compared to the 14.2% unemployment rate of Ireland, and with 4 of the top 10 most liveable cities in the world according to The Economist…the grass may indeed be greener!

The Four Pillars

A little history, Australian banks were tightly regulated with controls over services, banks, exchange rates and foreign bank entry. Then in the 1980’s following The Campbell Inquiry a change took place and deregulation slowly was implemented to help increase efficiency and competition. This means that today the central bank of Australia, The Reserve Bank of Australia (RBA), can make decisions independently of political policy. It is primarily concerned with the stability of the currency and uses monetary policy to achieve inflation targets of 2-3%. It manages short term interest rates and influences cash rates to help stabilize the economy quite successfully. During the beginning of the global economic crisis, inflation in Australia reached a high of 5% in 2008 before falling to a low of 1.3% the following year. By the end of 2011 the consumer price inflation in Australia appeared to have eased to 3.1% after reaching a high of 3.6% during the year, although still on target this allowed the RBA to shift monetary policy and reduce the interest rate to 4.25% to boost the economy and pass the lower rates onto the borrowers. The RBA appears to be acting cautiously as they still have scope to further reduce the interest rate in case the global crisis worsens.

According to McDonald & Marling (2011) and Pais & Stork (2011) Australian banks appear to have escaped the crisis and are in a strong stable position showing resilience to the global downturn. They have remained profitable and maintained their credit ratings. In fact during 2009 Australia’s top 4, known as the ‘pillar’ banks, entered the world’s top 20 safest banks for the first time. This is an encouraging sign to the economy and gives confidence to Australians. The interbank market also appears to have fared well however as the ‘pillar’ banks maintain a strong link to each other but it may only take one failure to lead to a full on crisis! 

Uh-Oh We're In Trouble, Something's Come Along And It's Burst Our Bubble...(Maybe)

Only a few economists believed when the housing bubble burst, financial difficulty would be imminent, including Dean Baker who wrote about it in his 2009 book entitled ‘Plunder and Blunder, The Rise and Fall of The Bubble Economy.’  You just have to look at the UK or US, the real estate bubble went pop and then a recession hit. So if bubbles bursting do lead to an economic downfall, what does this mean for Australia??

For those considering emigrating it may be worth noting that the price of houses in Australia has increased more than the UK and US in the past 25 years. According to figures from the RBA the average house price rose from $375 000 in 2005 to $540 000 in 2009. As I found out first hand, renting reflects these high house prices, where a room could be anything from $200 to $1000… per week!

Mortgage debt is the largest type of Australian debt and has been driven by the financial sector and the government which offered a First Time Owners Grant in an effort to boost the economy. The more credit was extended the more house prices increased and the real estate market became overvalued. The combination of these higher debt levels and rates has taken its toll on a typical Australian family, who spend far more on mortgages than anything else and may be reaching a limit on what they are able to pay. The RBA have lowered interest rates and the first 11 months of 2011 showed only a 3.7% decrease in house prices but the rating agency Moody’s believes that the current house prices are ‘not sustainable’. Some economists appear to be ignoring the $2 trillion bubble but others including Steve Keen believe the market has topped out and has predicted that the Australian housing bubble will pop very soon.

So will the bubble burst soon and will it lead to an economic crisis, or will Australia be in a better position than other countries to withstand it? Only time will tell!

BBC - Australian Economy Bucks Global Downturn

Here is a short video from BBC News which gives a brief summary about Australia's economy and the import and export business.

No Country Is An Island

As the largest island in the world, Australia relies on imports and exports from other countries and holds many free trade agreements with countries such as US and Chile. It is their relationship with China that appears to be the most significant and is the largest source of both imports and exports, as seen in the diagrams below from the Australian Government, Department of Foreign Affairs and Trade. The growth in its economy has provided a lot of support to Australia through the global economic crisis and there appears to be a close trade relationship and even the recent slowdown in China's growth is reflected in Australia’s economy.

Australia's Export Market, 2010 ($ billion)

Australia's Import Market, 2010 ($ billion)

Resources such as iron ore and coal are Australia’s main exports and the mining and resource sector faced a major boom due to investment from China. According to the RBA Australia’s output growth in the latter months of 2011 was above trend due to mining. The outlook for mining continues to look good, it has also helped to increase business investment and along with agriculture continues to be a lucrative source of employment for those emigrating from Ireland.

But what about the other sectors in Australia? Although agriculture appears to be recovering well from some extreme weather conditions in the recent years, other sectors including retail do not appear to be as encouraging. The overvalued Australian dollar has not helped, adding extra pressures on exporters. While on a visit to Best’s Great Western Winery, Victoria, Viv Thomson (owner, wine expert and unfortunately no relation!) described how the current exchange rates were essentially making his product less competitive.

Although Australia may seem relatively safe with its strong trade relationships with Asia, it needs to be aware of what is happening globally. The reduced business and consumer confidence in other countries may become contagious - no country is an island!   

Australia, The Economic Crisis... What Crisis??

With over a reported 42000 people emigrating from Ireland in 2011 many have decided to make the move down under to Australia. Is it for the sunshine, the laid back lifestyle or because Australia has remained relatively unscathed by the current economic crisis compared to many other countries, giving young professionals more opportunities. During 2011 I spent several months living and working in Australia and found it surprising how the daily life and Australian economy appeared to show little signs of a crisis.

In the past Australia has experienced periods of steady economic growth due to its diversified economy and continues to be a fast growing, stable and developed modern economy. In 2011 it was the 13th largest national economy based on nominal GDP. The effect of the recent economic crisis appears to be considerably less than in other countries such as USA or Ireland. There has been little intervention by the RBA (Reserve Bank of Australia) or the Australian government, with banks continuing to be profitable and in a relatively healthy condition. Although the recent global market did lead to falls in share prices of Australian banks and tightening in funding conditions the overall effect has been rather modest. Julia Gillard, Prime Minister of Australia said in 2011 that, ‘Australia’s economy was not knocked off course by the global financial crisis, nor by the floods and natural disasters we sustained over the summer,’ and she has consistently shown confidence in the Australian economy.

Over the coming weeks I intend to investigate some of the different aspects of the Australian economy, how the global recession has affected them and what, if any, effects there will be in the future.