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Twenty Years Without Stumbling - Big Sky Financial Solutions

Twenty Years without Stumbling



6 February 2012

Australia recently reached an economic milestone. At the end of June 2011, the Australian economy marked two decades without a recession. A report released in September by the Australian Bureau of Statistics 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.

the "recession we have to have" seems a distant memory now, and since then we have forged ahead without serious pain while many other countries have stumbled.

This record of uninterrupted growth highlights how well Australia is placed to cope with challenges besetting the global economy, including the lack of investor confidence in Europe that has undermind global share markets in recent weeks. 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 5.1%, which is more or less regarded as full employment. Inflation is within - albeit just within - the Reserve Banks' 2% to 3% target range. Consumer prices advanced 2.9% in the year to June.

The terms of trade (the prices we get for our exports compared to imports) have surged by 36% 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 companiers 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, as it is beginning to do again with two recent rate cuts. The Australian cash rate is now at 4.25% whereas in Europe, Japan and the US the cash rates are 1.5%, 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 8% respectively. While returns from the stock markets of these countries have been mediocre, Australia is benefitting as the industrialisation of these giants is boosting the prices of our commudity 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 from India and China.

That should not be construed as assuming that there will be no bumps on the way. With Europe struggling to find its way out of its insolvency crises and the US seemly on a 'muddle through' course to gradual revival, there will be times when confidence falters and the economy slows.

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

Source: Fidelity


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