Australia Will Outperform Global Economies, RBA Says

By Jacob Greber

Feb. 18 (Bloomberg) -- Australia’s economy will keep outperforming international counterparts because its financial system is in better shape, monetary policy is working and it had more momentum prior to the global financial crisis, central bank Assistant Governor Malcolm Edey said.

“There are reasons to expect that the Australian economy can continue to perform better than its international counterparts in the difficult period that lies ahead,” Edey said in a speech in Sydney today, without naming peer economies.

To cushion Australia against a slump in global demand for exports and waning consumer and business confidence, the Reserve Bank of Australia has slashed borrowing costs by four percentage points since September to a 45-year low of 3.25 percent. The government will also spend A$42 billion ($27 billion) on cash handouts to families and on infrastructure.

“As in other countries, substantial monetary and fiscal measures have been taken to support growth,” Edey told a conference organized by the Committee for Economic Development of Australia. “But an important difference is that the Australian financial system remains in much better shape than its international counterparts.”

That means policy makers have been able to gain “much more traction” from cuts in official interest rates, particularly for housing loans. The bank’s five interest-rate reductions since September have saved borrowers with an average A$250,000 home loan more than A$680 a month.

Home Loans

“This is in marked contrast to other countries, where banks have been more heavily affected by financial strains and the degree of pass-through has been much more limited,” Edey said.

Australian home-loan approvals rose in December by the most in almost nine years as the central bank’s rate cuts and government handouts spurred first-home buyers. To prevent a collapse in property prices and boost house building, the government in October tripled a grant to first-time buyers of new homes to A$21,000.

“We’ve certainly seen a further deterioration around the globe and in Australia,” Westpac Banking Corp. Chief Executive Officer Gail Kelly said today. “The very material monetary and fiscal policy initiatives in recent months and weeks are certainly very welcome and we think that it’s very likely that there will be more of this.”

Falling Currency

Another factor helping to insulate Australia’s economy is the depreciation of the local currency, which has tumbled 35 percent against the U.S. dollar since reaching a 25-year high of 98.49 U.S. cents on July 16 last year. That has boosted the local value of exports such as iron ore and coal.

The Australian dollar traded at 63.42 U.S. cents as of 9:27 a.m. in Sydney from 63.36 U.S. cents just before Edey’s speech. It has declined 1 percent from 64.06 cents late in Asia yesterday.

Australia also “had more momentum than most comparable economies in the period leading into the crisis,” Edey added.

Gross domestic product will probably expand 0.5 percent in the 12 months through December, the central bank forecast earlier this month. By contrast, many of Australia’s major trading partners, including Japan and the U.S., are forecast to stay in recession.

“Having said all that, there’s no doubt that Australia will be operating in a difficult international environment this year,” the assistant governor said.

China Demand

Japan’s economy shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, a report showed this week. The U.K. economy will contract 3.3 percent this year as the credit crisis plunges the nation deeper into the worst recession in almost 30 years, the Confederation of British Industry said on Feb. 16.

China, Australia’s largest trading partner, said on Feb. 11 that exports fell last month by the most in almost 13 years, tumbling 17.5 percent, as demand dried up in the U.S. and Europe.

Australia’s central bank expects the major industrial economies will contract further in the first half of this year, before strengthening later this year and in 2010, Edey said.

“The situation is still very uncertain, but for the reasons I’ve been outlining, that seems like a reasonable expectation.”

Central bank policy makers led by Governor Glenn Stevens hold their next monthly meeting on March 3.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net