The Wonder Down Under

Posted September 16, 2009

With a solid banking system, good economic management, political stability, healthy public finances, an open economy situated smack in the middle of Asia’s growth path, we really are the lucky country.

Just ask our top ecnocrat the Secretary of the Department of the Treasury Dr Ken Henry. The good doctor sees a very bright future for Australian as the world economy gathers itself, shakes off the dust and gets back on the horse. “The Australian economy will be seen as possessing the best of the qualities – of governance and flexibility – of the developed world while also offering an abundance of real investment opportunities usually found only in the developing world,” he recently told the Australian Industry Group’s annual conference.

Dr Henry’s upbeat assessment of the medium term for Australia is thanks to a range of factors. We were saved by a US/Europe-style banking meltdown, among other things, thanks to our prudent regulatory system and the fact that we had a relatively smaller pool of non-bank lenders to go bust. As a result the banking system can more quickly rebuild itself and start lending money to business and hence oil the machinery of capitalism. In addition the Federal Government’s swift stimulus packaging has spurred GDP growth. And employer flexibility in limiting job cuts so far has helped unemployment stay below forecasts. Meanwhile, Australian household wealth hasn’t been smashed by collapsing property prices and our budget deficit (when a government spends more than it receives) is not running overseas levels like 11.2% in the US. Also the fact that we predominantly export essential commodities, instead of higher value manufactured exports, has seen us avoid much of this year’s record 10% plunge in world trade. In fact, according to the RBA export, volumes are actually up 3-4%. Also as our economy has decoupled from the US our fate is not so tightly linked to theirs. The most important thing, however, is that the crisis has not greatly changed the unfolding narrative of the great Australian China boom/coat tails story.

As the tide of the crisis recedes, we are being revealed to the world as economically strong and a great place to settle for foreign capital. In fact, according to Ken Henry, it was “quite likely” that Australia “might attract an even greater share of global capital flows, and quite possibly even larger capital flows in aggregate”. What this means is that our growth prospects are less likely to be “constrained by a reduced capacity to attract foreign capital”. Further to that, Dr Henry suggests that foreign capital inflows, attracted by Australia’s China success, will allow us to finance a bigger current account deficit.

In other words we are on the verge of becoming the preferred destination for international capital keen to find a nook over the next five years or so and if that transpires we had all better get used to the attention.

In other news … the Australian economy has again shown its resilience with the unemployment rate last month steady at 5.8%, as it was for June. Our labour market hasn’t fallen in a heap like the US’s where the August rate was 9.7% – a level unseen since the 1982 recession. On one estimate I read in the New York Times there is currently one job opening in the US for every six people looking for work. In other words, we really are the lucky country at the moment.