Last October, as growth in most of the world turned negative, Australia’s prime minister, Kevin Rudd, predicted that Australia would avoid recession. But it was already becoming clear that Australia had not miraculously escaped the global downturn. By February, he was promising to “move heaven and earth” to bolster the economy. Now he’s acknowledged that recession has arrived. Growth fell by 0.5% in the fourth quarter as the consumer boom cooled and commodity exports sank. Australia is now set for its first full-year contraction since 1991.
“Conservative monetary and fiscal management” – the latter helped by the commodity boom, which boosted corporate tax revenues – has given the government scope to counteract the downturn, said the International Monetary Fund (IMF). The banking system, too, appears relatively healthy. However, as Elizabeth Knight pointed out in the Sydney Morning Herald, company defaults are on the rise and “we haven’t even started to see damage in the consumer end of the economy”.
Another Anglo-Saxon debt bubble
On the domestic front, Australia’s economy looks much like the US or the UK. There was a huge housing bubble and consumers were “just as profligate”, said Lex in the FT. Household debt hit 177% of income, more than in Britain, as rocketing house prices spurred borrowing.
Now the bubble has burst. House prices in eight major cities fell a record 2.2% in the first quarter, 7% year-on-year. Affordability remains low, with mortgage payments still comprising around 10% of disposable income, said Capital Economics. The ratios of prices to rents and incomes also imply the market has “a long way to fall”. Unemployment is rising while job advertisements, a key leading indicator, plunge. Consumers are starting to cut back, as the 20% annual drop in car sales in the first four months shows. The Economist Intelligence Unit expects consumption to slide by 1.7% this year.
What next?
In February the government unveiled a stimulus package worth 3.6% of GDP, which is alleviating the impact of the downturn and should ensure that the dip is shallower than in most developed countries. But with the global economy still weakening and the domestic outlook worsening, the IMF is pencilling in a contraction of 1.4% this year. The “lucky country”, said Lex, is “looking distinctly less so”.