Up is in vogue these days. It almost seems that there is pressure to unearth upbeat economic stories, and make a lot out of them. Many key economic indicators have cooperated lately, and on that score, the Australian economy has garnered a fair amount of attention. What is up Down Under?
Like Canada, Australia is a small, open economy: relatively small in population, with above-average dependence on international trade for its overall growth. And like Canada, a large share of Australia’s overall commerce is directly tied to primary natural resources. However, in contrast, Australia doesn’t have on its doorstep a huge, homogeneous market with a mammoth appetite. Undaunted, Australia has aggressively pursued diverse trade ties and opportunities in fast-growing Asian economies, an initiative that has turned heads and paid dividends. Trade intensity – exports and imports as a share of GDP – has lurched from 26% in 1990 to 45% in 2008. That’s an impressive record by any standard. But is Australia’s strategy continuing to pay off during the global economic recession?
Following the global trend, overall growth eased sharply in the second and third quarters of 2008, and the economy contracted in the October-December period. But unlike most others, Australia avoided a technical recession, surprising onlookers by eking out 1.5% growth in the first quarter of this year. A large contraction in business investment was offset by robust consumer spending and a large, trend-defying increase in exports. Commendable performance, all things considered.
Is the good news continuing? Key monthly indicators still have bragging rights. Housing markets remained buoyant in the second quarter, with sales and construction increasing through June. Employment recently captured the headlines, as over 32,000 new jobs were added to the rolls in July, flying in the face of the global trend. The unemployment rate was stable, at a relatively low 5.8%. Consumer confidence remains strong, and retail sales are up 7.9% over last year’s levels.
With talk of global recovery gathering pace, one might pre-conclude that Australia has squeaked through, far less scathed than most. Not so fast – key challenges remain. Recent foreign trade numbers are worrisome. Strong domestic consumer demand has boosted import demand, but at the same time exports took a turn for the worse in the second quarter. From growth of 22% as recently as March, the year-to-year change in exports has sunk to a 12% decline in June, swinging the trade balance from a $2 billion surplus to a $441 million deficit.
Why the untimely reversal? Past figures were bloated by high commodity prices, but the expiry of contracts has sent effective prices for coal and iron ore tumbling. In addition, lower overall global demand has affected volume shipments. Moreover, Australia’s is a victim of its own success, as the sustained volley of upbeat news sent the Australian dollar soaring by 31% since early March. The trade reversal will likely prove temporary, as the shock to the economy checks currency appreciation, and as the tide of Asian public stimulus stems the nascent decline in Australia’s regional exports.
The bottom line? A focus on trade promotion and diversification has partially shielded Australia from the worst effects of the recession. Its exposure to external forces still presents near-term challenges, but Australia’s recent experience is a good lesson on the benefits of embracing globalisation.