Australia’s economic milestone

March 12, 2012

Australia recently reached a much ignored economic milestone. At the end of June, the economy marked two decades without a recession.

A report released in September showed that Australia’s economy grew 1.2% in the June quarter, to give 1.4% growth for the financial year. This was the 20th consecutive year the economy has grown, for our last recession ended in the June quarter of 1991.1

This record for uninterrupted growth highlights how well Australia is placed to cope with the challenges besetting the global economy, including the lack of investor confidence in Europe that has undermined global share markets in recent times.

While the woes in Europe and the US have dented business and consumer confidence in Australia, our economy shines in comparison with much of the developed world.

Unemployment is 5.2%, which is more or less regarded as close to full employment. Core inflation is within the Reserve Bank’s 2% to 3% target range, running at 2.5% in the year to September, 2011.

The terms of trade (the prices we get for our exports compared to imports) have surged by more than 30% in the past two years and are at their highest level since records began in the 1870s. Our high dollar means, in effect, that we have all had a pay rise – we can afford more imports or overseas trips – even if the strong dollar makes life tougher for exporters. Even with a high currency diminishing the value of foreign sourced revenue, our companies are posting solid earnings and have strong balance sheets.

There are no reasons to be especially gloomy about Australia’s economy in coming years. The Reserve Bank, unlike many of its peers, has the ability to cut interest rates to revive the economy, if required. The cash rate is at 4.5% after November’s 0.25% cut whereas in Europe, Japan and the US the cash rates are 1.25%, effectively zero and close to zero respectively.

Our financial system appears sound. Our banks avoided the excesses of their global peers and are among the highest rated in the world. Our government debt is low as a proportion of GDP, being at a ratio of 22% compared with, say, 225% for Japan, about 80% for Germany and about 60% for the US.

Most importantly of all, Australia is benefiting from the rises of China and India that are expanding at annual paces of about 9% and 7% respectively. The industrialisation of these giants is boosting the prices of our commodity and food exports while bolstering sales in volume terms. Businesses have committed to long-term investment plans to ensure Australia has the capacity to meet the heightened demand from India and China.

Australia has economic challenges such as a perennial current-account deficit, high foreign debt, hefty consumer debt and perhaps an overvalued property market. But with all its advantages, there is no reason why Australia’s economy can’t extend its record for uninterrupted growth for a while yet.

1 Australian Bureau of Statistics. The economy contracted 1.4% in the March quarter 1991, shrank 0.2% in the June quarter 1991 before it expanded 0.4% in the September quarter of 1991.

Source: FIL Investment Management (Australia) Limited, December 2011


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