Australia haunted by imaginary crises
By Peter Thal Larsen
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
“Australia is a lucky country run mainly by second-rate people who share its luck.” So said academic Donald Horne in his 1964 book, The Lucky Country. Yet you wouldn’t know it from the surly mood as Australians prepare to vote in a general election on Sept. 7. Despite the country’s enviable economic track record, citizens are haunted by past turmoil and apprehensive about the future. These enemies are more imagined than real.
Australia did not have a financial crisis, but many Australians behave as if it did. While most of the developed world tipped into recession, the country continued to expand, recently completing its 22nd year of uninterrupted growth. No banks were bailed out. Unemployment is below 6 percent and inflation under control. Yet Australians have reined in spending: they collectively save more than 10 percent of their net income, triple the rate in early 2008.
Such behaviour is strangely cautious in a country where roughly a third of the workforce joined the labour market after the end of the last recession, in the early 1990s. One explanation is Australians’ sensitivity to bad news from other English-speaking countries. Another is the unsettling sell-off in stock markets, which dented the value of pension accounts to which every citizen is required to contribute.
The new concern is a looming end to the country’s largest-ever resources boom. Spending on construction and equipment to feed Chinese demand for iron ore, coal and other raw materials kept the economy humming when other sectors faltered. The end of that bonanza will depress growth: mining investment will drop from 6.5 percent of Australian GDP in 2012 to 2 percent by 2018, according to Morgan Stanley Wealth Management.
That provides a gloomy backdrop for the election, which looks set to produce an administration led by the conservative Liberal-National coalition. Voters seem more motivated by getting rid of Labor Party prime minister Kevin Rudd, who returned to the job in June after ousting the unpopular Julia Gillard, than by enthusiasm for opposition leader Tony Abbott. Yet where the economy is concerned, there are good arguments for optimism. Here are three.
Firstly, the resources slowdown is less dramatic it may appear. Though investment in mining capacity has peaked, new iron ore and coal projects are still ramping up production. Australia has also spent heavily on producing liquified natural gas. Even as prices fall, exports should rise. Not all of that will benefit Australians directly: some of the profit will be paid in dividends to overseas investors.
The second comfort is that the rest of the economy can pick up some of the slack. The Reserve Bank of Australia has slashed interest rates to 2.5 percent, boosting the housing market. Demand is now mostly from investors and overseas buyers. Over time, the monetary boost should also stimulate new construction.
Finally there’s the Australian dollar, which has been weakened by low rates and expectations of rising borrowing costs in the United States. The currency has fallen by 13 percent against the U.S. dollar since early April, and could drop further. At 92 U.S. cents, it remains well above the long-run average exchange rate of about 75 cents.
Devaluation will relieve some of the pressure on industries that have suffered from the strong currency. While manufacturing exports will take time to rebuild, the cheaper currency should attract Asian tourists, while more Australians holiday at home. Foreign demand for education – one of Australia’s largest export industries – will also benefit.
There are still risks. Chinese growth could disappoint; the euro zone could pitch back into crisis. The U.S. Federal Reserve’s expected decision to slow bond-buying could raise the cost of borrowing for companies and the government. The new administration could also exacerbate the mining slowdown by overzealously implementing promised spending cuts.
Abbott himself adds uncertainty. As the incumbent party self-destructed, the opposition leader kept his campaign pledges to a minimum. Even his promise to repeal the country’s mining and carbon taxes will need the support of Australia’s Senate, which the new government probably won’t control.
At the very least, however, the new prime minister has a chance to eschew the on-the-hoof policymaking that damaged the Labor Party. That would help business confidence, which remains low. “The key is not what he’ll do, but what he won’t do,” a senior Australian executive says of Abbott. If he lives up to these low expectations, Australia’s next crisis should be as imaginary as its last.