Can Australia’s Economic Luck Hold?

The Lucky Country’s economic winning streak has now stretched to a world-beating 26 straight years. But amid record household debt, sluggish wages, and subpar growth, few Australians are popping champagne corks over the milestone.

The previous record, held by the Netherlands, was officially broken earlier in 2017 when Australia’s gross domestic product (GDP) data for the March quarter showed 103 straight quarters of expansion.

Welcoming the figures, Australia’s Treasurer Scott Morrison said: “A generation of Australians have grown up without ever having known a recession. That's a tremendous national achievement, but it's not one we can take for granted.”

The developed economy record was extended further in the June quarter, with the world’s 12th largest economy posting a 0.8 percent GDP rise and a 1.9 percent average gain for fiscal 2017.

The Wall Street Journal has praised Australia’s “miracle economy,” noting that the last time Australia had a recession, Vanilla Ice was topping the charts, Boris Yeltsin was leading Russia, and the first Gulf War had just ended.

During Australia’s record growth period, the United States fell into recession twice from the “dot-com” bust and the global financial crisis (GFC), while East Asia went backwards during the 1997 Asian financial crisis. Japan, Australia’s second-largest trading partner, has suffered six recessions in the past 30 years.

Economists have attributed Australia’s good fortune to a range of factors. Decisions made in the 1980s and 1990s to float the dollar, cut tariffs, and grant independence to the central bank are seen as crucial, along with deft management of financial crises such as the GFC.

Australia’s federal treasury forecast a recession during the GFC, but it was offset by some A$20 billion (US$16 billion) worth of cash handouts by Canberra, which helped stimulate consumer spending, along with interest rate cuts by the Reserve Bank of Australia (RBA).

The emergence of China as the world’s second-largest economy and biggest consumer of resources powered a mining boom during the GFC that stimulated Australian business investment, peaking in 2013 at two-thirds of economic growth. Subsequent record low official interest rates and continued federal budget deficits helped sustain the expansion, albeit at a slower pace as the mining sector cooled but with an improving housing sector.

Griffith University’s Fabrizio Carmignani, a professor of economics, describes Australia’s economic success as “a combination of factors – good institutions, good policies, natural resources, and the opportunity to trade with some of the fastest-growing countries in the world. We shouldn’t underestimate the ability of Australia to take advantage of these factors, since it’s not always the case.”

The University of Queensland’s John Quiggin cites a combination of “good luck and good management,” along with a recovery from the previous bad recession of 1990-91.

“Having made bad policy decisions leading up to that recession, we basically called nearly everything right after it. In the Asian financial crisis we let the dollar devalue, whereas New Zealand raised interest rates; in the GFC, we went in hard with fiscal stimulus. Those were the two situations where you could have expected a recession and we avoided it,” the economist said.

However, others suggest Australia has suffered downturns in recent years, even if they were not reflected in the official data.

“I think it is a mistake for us to keep telling this story of so many years with no recession,” former RBA Governor Glenn Stevens told a business audience in 2014.

“I don't actually think it is accurate, for a start. But for the vagaries of quarterly national accounting we might well have called the end of 2000 a recession. We would have called the end of 2008 one; in fact, I would call it that.”

Stuck in First Gear

The latest GDP data released in September showed an economy stuck in first gear, posting in the June quarter the 19th straight quarter of annual GDP growth below 3 percent.

“The slump in real household income growth and the weakening outlook for dwellings investment suggests to us that the RBA’s GDP growth forecast of 3 percent in 2018 is too optimistic. We believe 2.5 percent will be nearer the mark, which will force the RBA to keep interest rates at 1.5 percent until late 2019… roughly a year later than the financial markets expect,” said Paul Dales, Capital Economics’ chief Australia and New Zealand economist.

ANZ Research said the GDP figures revealed an economy “running below its potential growth rate without inflation pressure.” More worryingly for the Turnbull government, the bank’s economists said Australian consumers “remain a key risk” due to record high debt levels and record low wage growth.

“The propensity and behavior of the household sector is key to the growth numbers given its substantial share of national expenditure (around 57-58 percent),” the bank said.

While consumer spending rose by 0.7 percent in the June quarter, household savings slipped to 4.6 percent, down from the peak of 10.9 percent in 2008. A housing boom in the nation’s major cities of Sydney and Melbourne drove a “wealth effect” in these cities as consumers took advantage of their increased equity.

However, “with house price growth easing and consumers still weighed down by debt, how much longer can this go on?” ANZ asked.

The Guardian’s Greg Jericho notes that while nominal GDP grew by 7.6 percent in the year to June, wages and salaries expanded by just 1.5 percent, even while corporate profits surged.

“Given the low wages, growth is dependent on people reducing their savings. That is hardly sustainable and why the government – and the rest of us – will be hoping the good noises in parts of the economy soon begin to be echoed in our wages,” he wrote.

External Shock?

Yet if households are feeling the pinch now, an external shock could be the final blow. Analysts point to the threat of a downturn in China, currently Australia’s largest trading partner, or a housing market collapse as the two main threats to the economy, along with geopolitical risks such as war with North Korea.

“A significant slowdown in China would weaken our economy. If at the same time there’s adverse movement in the housing market in Australia and persistent global political and economic uncertainty, then we might experience an economic slowdown and possibly one or two quarters of negative growth,” said Griffith University’s Carmignani.

“The good thing is that the RBA is closely monitoring the housing market… everyone seems willing to operate toward a soft landing, rather than a crash.”

UBS economists have also suggested that a sharp rise in interest rates by the RBA “risks triggering a crash” in the housing market, which it considers peaked earlier in 2017.

UBS sees residential house price growth slowing from a double-digit pace to 7 percent in 2017 and zero to 3 percent in 2018, “amid record supply and poor affordability.”

The University of Queensland’s Quiggin said recessions resulted from either macroeconomic policy missteps – “tightening too much or letting things go too much so you have to tighten” – or from financial crises.

“I don’t think there’s an inherent reason why things have to go wrong, but good luck doesn’t last forever,” he said.

“I would give some credit to the current government – even though they talked a defiant game about austerity, when faced with the actual choice they decided it wasn’t quite the time to bring the budget back to surplus.”

Quiggin said a rise in interest rates to a “normalized” level, such as the RBA’s proposed “neutral real rate” of 3.5 percent, could cause the economy to collapse.

“We couldn’t really return to a ‘normal’ level without a sustained period of high inflation, say 10 years of 5 percent inflation, but getting it is very difficult,” he said.

The International Monetary Fund’s October “World Economic Outlook” sharply revised down its projection for Australia’s GDP growth to 2.2 percent in 2017, from the 3 percent it tipped in April. It also cut its forecast for 2018 to a 2.9 percent expansion.

The Fund’s latest report on Australia, released in February 2017, warned that the nation “has not been immune to some elements of the ‘new mediocre.’ Wage and price pressures have been weak, underemployment has risen, and private business investment outside mining has been lackluster.”

It pointed to “significant risks and uncertainties, notably weaker-than-expected domestic consumption, housing-related vulnerabilities, the rise in protectionist policies in the global economy, and a significant slowdown in Australia’s main trading partners.”

Should such a crisis hit, the central bank has limited scope to ease policy further, given the current record low official rate of 1.5 percent, although it could consider quantitative easing policies similar to those introduced overseas.

Fortunately however, Canberra could also consider another fiscal stimulus, given that general government net debt remains relatively low at around 21 percent of GDP, despite a decade of broken promises to achieve a budget surplus.

Will Australia’s winning run continue? Quiggin attributes much of it to simple good luck, but Carmignani urged more reform to maintain living standards, such as by fostering entrepreneurship and proactively supporting innovation.

“The risk that I see is we are not doing enough to guarantee that the living standards of the next generation will progress in the same way as our living standards have progressed in the last couple of decades. We’ll always do better than most countries, but can the next generation do better? I’m not convinced.”