September 03, 2015
Australia confirmed its 24-year economic winning streak in its latest gross domestic product (GDP) data released Wednesday. However, extending the recession-free record beyond a world-beating 26 years could prove more troublesome for the “Lucky Country” in the wake of China’s downturn and domestic squabbles over trade and reform.
Real GDP expanded by 0.2 percent in the June quarter, below market expectations of a 0.4 percent gain and well down on the March quarter’s 0.9 percent rise. While household consumption, government spending, and non-residential building activity grew, exports slumped 3.3 percent compared to the previous quarter, while dwelling investment dipped by 1.1 percent.
Financial markets reacted negatively, with the Australian dollar dropping below US$0.70 for the first time in more than six years, amid forecasts it could drop even further due to weak commodity prices.
Nevertheless, Australian Treasurer Joe Hockey said the world’s 12th-biggest economy was still “growing well despite the biggest fall in our terms of trade in more than 50 years.”
“At a time when other commodity based economies like Canada and Brazil are in recession, the Australian economy is continuing to grow at a rate that meets and sometimes beats our most recent budget forecasts,” he added.
The treasurer pointed to increased housing and construction investment and a rise in services exports, despite a slump in key mining exports such as iron ore and coal on the back of “massive falls in commodity prices.”
Earlier in the week, Hockey told the Financial Times that Australia could even surpass the Netherlands’ modern-era record of 26 straight years of economic growth, which the Western European nation achieved between 1982 and 2008 on the back of its North Sea oil wealth.
“Cassandras are loud, whereas optimists are getting on with the job. We are going to break the record and go beyond the Dutch,” he told the British daily.
Since the “recession we had to have” in 1990, Australia has enjoyed an unbeaten growth spurt, aided by economic liberalization and in more recent years, an unprecedented mining boom as China emerged to become the world’s second-biggest economy.
‘Falling Off A Cliff’
Yet with the nation’s top two trading partners of China and Japan noticeably slowing, the eurozone struggling to revive, and even neighboring New Zealand facing its own growth headwinds in the wake of falling dairy prices, not all analysts share Hockey’s optimism.
The latest GDP data showed the 12th straight quarter of sub-par performance, with the nation’s terms of trade – measuring export prices compared with imports – down 10.6 percent over the financial year, the biggest decline in decades. Australia’s growth in the latest quarter was half of Germany’s and even below the level of troubled eurozone nations Greece and Spain, noted the Australian Financial Review’s Jacob Greber.
“The key take-out is just how perilous things are now,” economist Stephen Anthony told the financial daily. ”We’re falling off the mining investment cliff and that’s occurring at a time of incredible instability on financial markets. That has to be negative for real output growth.”
ANZ Research said the national accounts provided “very few reasons for a positive narrative on the outlook for the Australian economy,” indicating growth “remains anemic.”
“While GDP growth was held down by a significant subtraction from net exports, business investment also fell and household consumption growth remained soft. And without a strong contribution from public demand, GDP growth would have been much weaker,” the bank’s economists said in a research note.
According to ANZ, annual growth has now slowed to a below-average rate of 2 percent, which is expected to continue at least for the second half of 2015.
“Mining investment is still set to be a significant drag on GDP with sharper declines likely over coming quarters as large-scale [liquefied natural gas] projects approach completion, while the outlook for non-mining investment continues to be quite uncertain,” the economists said.
“Firms are already planning to reduce investment over the next year, and the lack of any meaningful pick-up in household spending growth makes it difficult to expect significant improvement in these plans. Moreover, the deterioration in the international environment suggests the outlook has become even more unpredictable.”
On Tuesday, the Reserve Bank of Australia kept its official cash rate steady at a record-low 2 percent, with Governor Glenn Stevens citing “further softening in conditions in China and east Asia of late, but stronger U.S. growth,” along with falling commodity prices.
He also noted that equity markets had been “consistently more volatile of late, associated with developments in China, though other financial markets have been relatively stable.”
“Overall, the economy is likely to be operating with a degree of spare capacity for some time yet, with domestic inflationary pressures contained,” he said.
Although financial markets were only pricing in a 5 percent possibility of a rate cut at the September board meeting, the bond market is eyeing a 70 percent chance of a reduction in November, according to Business Spectator.
According to the AFR’s Greber, the slowdown has reinforced warnings from economists at a recent National Reform Summit that “Australia is in danger of sleepwalking into a major downturn.”
“When the March national accounts were released back in June, the treasurer huffed and puffed, telling us all that we were one of the fastest growing economies amongst our developed nation peers, that his government was ‘lifting the tide,’ Shadow Treasurer Chris Bowen said.
“Making matters worse, growth would have been negative if it hadn’t been due to a spike in government spending. Yes, this is not a typo. The economy under Hockey and Abbott would have gone backwards if it wasn’t due to higher public spending. I’m sure I don’t need to spell out the irony here.”
Real net disposable income per capita, a broad measure of living standards, fell in June for the fifth straight quarter, dropping to a five-year low of A$13,084 ($9,180), underscoring what economists have called an “income recession.”
“It’s a longer income squeeze than we saw in the recession of the early 1990s,” Deloitte Access Economics’ Chris Richardson told the AFR. “Our Catch-22 is that when our pie is shrinking, that’s when you need reform the most, but it’s also when reforms are hardest to achieve.”
Comprising representatives of business, unions, welfare and other stakeholders, the National Reform Summit held in Sydney on August 26 produced a number of recommendations for reform, including lifting productivity growth and workforce participation, better targeting welfare, and undertaking wide-ranging reviews of tax and retirement incomes. The government was also urged to return the federal budget to a “structural balance” progressively over a decade, while ensuring “equity” and efficiency.
According to the summit’s official statement, the need for reform is “now urgent. While Australia has enjoyed almost a quarter century of economic growth and weathered the global financial crisis better than other comparable countries, the nation’s economic and social position is slipping,” it said.
While the Abbott government has touted its free trade agreements with China, Japan and South Korea as key to the nation’s growth prospects, the China pact has come under attack from the opposition Labor Party amid concerns over the potential import of Chinese workers for major projects.
With the economic growth record barely two years away, crossing the finishing line suddenly appears a far tougher task for the land Down Under.
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