Commentary by William Pesek
Feb. 4 (Bloomberg) -- Australia’s budget surplus is history.
That’s the upshot of the government’s plan to spend A$42 billion ($26.5 billion) on grants and infrastructure to keep the economy out of recession. It will produce a A$22.5 billion shortfall, the first since fiscal 2001-02. Given the state of the global economy, that’s more than appropriate.
The implications of this go beyond Australia’s 21 million people. It’s as clear an indication as any that no economy, small or large, will escape the global crisis unscathed. Or, as Bill Evans, Westpac Banking Corp.’s chief economist, quips: “No one gets out of this one alive.”
Australia had been a prime candidate for avoiding the worst of the credit meltdown that began in the U.S. Six months ago, many saw Japan as a haven. Not quite. Asia’s biggest economy is now in a deepening recession. With Europe also sliding, Australia had stood out as an oasis of stability.
Forget that idea. Australia’s economy has probably followed the U.S., U.K., Japan and Europe into its first recession since 1991. Gross domestic product rose a scant 0.1 percent in the third quarter, the weakest pace in eight years. The fourth quarter was an ugly one around the globe.
Australia is facing greater obstacles than officials in Sydney and Canberra acknowledge. It would have been better to issue a more specific warning about recession risks. Can Australia really avoid negative growth? It’s doubtful.
Adult in Room
Relative to the most developed economies and Asia’s developing ones, Australia looks pretty good. Even after yesterday’s 100 basis-point interest-rate cut, Australia’s central bank has 3.25 percentage points worth of ammunition. That compares with essentially zero in the U.S. and Japan.
Australia also has some fiscal room for maneuver after years of surpluses. That makes Australia look like an adult in a room full of irresponsible adolescents, according to former Prime Minister Paul Keating.
“The G-7 is made up of debtor countries, countries like the U.S., Britain, France, Italy -- these are all borrowers,” Keating told Australian Broadcasting Corp.’s Lateline program this week. “There are no surplus countries in that.”
Useless G-7
Keating’s argument is that an overhaul of the global financial framework is needed to stem this crisis. Neither the Group of Seven nations nor the International Monetary Fund is up to the challenge as the U.S. deals with a debacle that might last six or seven years, he said.
“Get rid of the old G-7,” Keating said. “We’ve got to get rid of the old IMF. We’ve got to bring the surplus countries into the political framework.”
It’s a valid point. Why should it be left to the U.S. and other nations that created the system now crashing around us to concoct a new one? Steps taken to date in the U.S. seem aimed more at saving the old financial arrangements than presenting something new or different. Australia has done a solid job of managing its economy, so it should have a bigger say in a new financial world.
“Things are going to be very difficult,” says John Edwards, chief economist at HSBC Bank Australia Ltd. in Sydney. “But we also need to be conscious that our circumstances are very different. We limped through the fourth quarter last year, whereas other countries were in the most desperate circumstances.”
Those circumstances will become less unique as global growth cascades lower. A slump in world demand is cutting profits at companies, boosting unemployment and eroding household sentiment.
Australia’s Doorstep
Hence the central bank’s five interest-rate reductions since September and the government’s sudden willingness to go into deficit. There can be no doubt that the full weight of the credit crunch has arrived on Australia’s doorstep.
There are some complications worth considering. With short- term rates at a 45-year low, Australia is “getting to the point where monetary policy can do no more,” Evans says.
Household debt has almost doubled since 1999 to about 160 percent of incomes, a higher ratio than in the U.S. and U.K., AMP Capital Investors said in November. And the specter of a Chinese recession bodes poorly for Australian trade, which makes up one- fifth of the economy. Australia was too fast to rely on a developing nation for growth and may pay a price this year.
The China angle is clearly weighing on Prime Minister Kevin Rudd’s mind. On Feb. 2, Rudd said China’s slowdown and the global crisis would punch a A$115 billion hole in government revenue over the next four years. If China bears are right and growth in the third-biggest economy slows to less than 5 percent, Australia is in for an even more difficult 2009.
The question is whether Australia is truly less vulnerable to global events than its peers or experiencing the crisis in slow motion. The answer is anyone’s guess, though one senses an odd optimism in Sydney as global trends darken and head this way.
Australia won’t get out of this one without some bruises.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Sydney at wpesek@bloomberg.net
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