Economist Magazine – Australian economic miracle

The Australian economy has “great bones” of that I am sure and if I had the time at the moment to write a book it would be about the Great Australian Economic miracle and how it is neither transient or unexpected but the result of many years of micro-economic reform coupled with a fortuitous mix of rocks, dirt and tourist destinations that the world wants. And crucially how it can endure for many many years to come.

But I would however have to put in a chapter about the risks posed from the current political climate. Please don’t misunderstand, this is not about Labor or Liberal, Nationals, Greens or Independents but the composition of the Parliament and a lack of political ability, not will, to get the next stage of reform working through the economy.  

So it was when I saw an article in the Economist about Australia and the Australian economy over the weekend that I picked up on twitter that I thought they were about to unleash on us.

The Article was titled, “The case for complacency, She’ll be right. After 20 years of success, reform is a hard sell” and I thought they were about to launch into Australia. But on my read nothing could have been further from the truth. the article was the usual kind of stuff that we Australians already know. Here is a few pertinent quotes,

    • The global financial crisis did not pass Australia by, but neither did it drive it into recession…
    • The first reason for that was the strength of the four big banks. They were strong partly because Australian banking had already been through some bad times…
    • The public finances were as sound as the banks’. Mr Howard’s government had been running budget surpluses of 1-1½% of GDP for a decade and had all but abolished the national debt.
    • This allowed his Labor successor, Kevin Rudd, to provide two big fiscal boosts when crisis struck…The most effective stimulus, though, was the cheque for $900 that almost every taxpayer except the richest received in December 2008…
    • The central bank moved fast and never fell behind events…
    • The government’s and the bank’s actions, along with the reassuring speeches of its governor, Glenn Stevens, helped to damp down the early panic. And, once it became clear that Asia, and especially China, was going to rally, Australia was out of the woods

My bolding and of course the AUD fell as they noted in the article which was a really important shock absorber. Clearly it’s your usual litany of the how and why Australia, almost uniquely amongst developed Western economies sailed through the GFC.

But what perplexed me is the difference between the article’s Headline, sub-Headline and then content.

The part of the article that covered the “current” situation was all rosy and spoke of the scale, size and profitability of Australian exports or iron ore, coal and natural gas together with our absolute advantage over other jurisdictions ending with the following paragraphs,

This big change coincides with another: Australia’s economy—and with it inflation, interest rates and house prices, though not the stockmarket—has decoupled from America’s. A decade or so ago Australia’s GDP growth closely matched America’s, but the correlation has become much less marked, whereas that with China’s has got stronger. It all points to a rosy period ahead for Australia. Even if Chinese growth stutters, runs the thinking, even if China goes through a period of political upheaval, the appetite for development will not disappear, either there or in most other Asian countries. Billions of Asians are eager to join the middle class, and Australia is on their doorstep, ready to provide not just iron ore, coal and natural gas but all sorts of other minerals, and beef and mutton to boot.

So Australia’s position on the world map is no longer a handicap. Indeed, the tyranny of distance, so long bracketed with drought as Australia’s enduring curse, has been turned on its head. It is now the Antipodean advantage of adjacency.

The behavioural economics/finance guy in me has to ask the question whether the Economist magazine did indeed set out to do a hatchet job on Australia but found the story so compelling they ended up pulping their initial intent. Seems like it has to be a chance, doesn’t it? Even Jeremy Grantham is nuancing his Australian Property argument.

To me this and the focus on the terms of trade (chart above from the article)speaks volumes of why the AUD is so well bid and likely to have entered a higher range for the next decade than the last 3. It speaks volumes of why foreign central banks are buying AUD assets for their reserves, many for the first time. And it speaks volumes for why the vast majority of Australian Government bonds are held offshore.

But it misses the challenge of an economy that has its head in the oven (mining) and its feet in the fridge (housing and household consumption). On balance it is warm but  no one, least of all the Reserve Bank is comfortable.

The Australian economy is a real challenge at the moment, this week we get the partial indicators and then GDP which are expected to reinforce the bifurcated nature of the economy. We hope that the structure of this data gives the RBA pause for thought and that on Tuesday week they leave interest rates where they are.

We’ll update the data as it is released.

greg@lighthousesecurities.com.au

On Twitter www.twitter.com/gregorymckenna

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  1. Economist Magazine – Australian economic miracle | Lighthouse … | Brisbane Real Estate - May 31, 2011

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