Economic planning pays off for Australia, the land of the coffee-led recovery
Country in similar category to China: everyone has been waiting for the bubble to burst, but it hasn’t
While visiting yet another gentrifying neighbourhood in Melbourne, Australia, recently, I spotted a rather imperial looking bird strutting about with a dignified crown. It turned out to be a crested pigeon.
“Even our pigeons are living the grand life,” my companion quipped.
He was ribbing me because in my two weeks in Australia, I had more than once commented that so many people seem to be living the good life. For instance, in America I have friends who are teachers, and their credit cards are maxed out. Here, an in-law retired from teaching on a Friday with a full pension, started a new job on the following Monday and is now building an imposing house on a block of urban land that cost nearly A$1 million (HK$5.7 million).
Australia is in a similar category to China: everyone has been waiting for the bubble to burst, but it hasn’t. This includes many Australians, with at least one online newspaper here having a special icon to click to read aggregated stories on the “Australian housing bubble”.
Australia is dependent on foreign investors to plug its large current account deficit; has household debt levels at 175 per cent of gross domestic product; is reliant on a slowing and risk-prone China; has high business costs, including high wages; and has a stupendously expensive property market.
Yet it evaded a crash. The economy slowed but is now adding new jobs and expanding. Interest rates fell to a record low, acting as an automatic stabiliser, with the percentage of disposable income spent on interest payments falling from nearly 15 per cent to 7 per cent, thus boosting the scope for everyday consumption. The central bank paused in its policy setting some seven months ago.
“It’s a coffee-led recovery,” a friend in Melbourne jokes.
Indeed the many cafes are packed with customers in Sydney, Melbourne and even the country towns. Some of the patrons seem rather carefree and hip – whimsical streaks of blue or chartreuse in their hair, intricate tattoos, pricey ostrich-skin boots paired with jean shorts. The expression, “better to be lucky than smart” comes to mind. Is the issue that after nearly two decades of uninterrupted economic growth, Australians suffer from over optimism?
So it might seem on the surface. In fact, Australia’s long recession-free stretch may be the result of a rare case of decent economic planning.
In 2010, when Australia’s economy was still in overdrive thanks to the massive stimulus-backed spending wave in China, Reserve Bank of Australia head Glenn Stevens gave a speech in which he expressed a widely felt sentiment: this isn’t going to last forever.
How to prepare for the inevitable decline in commodities prices? Some resource-rich countries have sovereign wealth funds; Australia demands a high personal savings rate through its superannuation pension system.
Five years ago, Australia’s terms of trade were so strong that one ship load of iron ore could purchase 22,000 flat screen televisions: compared to 2,200 of the same only five years earlier.
“If the rise in income is only temporary, it would be desirable not to raise national consumption by very much,” Stevens said. “Instead, it would make sense to allow the income gain to flow into a higher stock of saving, when would then be able to fund future consumption.” Which is exactly what Australia was doing. At that time the net savings rate was 9 per cent to 10 per cent of income, up from a negative net savings rate before the commodities boom.
For a few decades after the 1950s, analysts and economists hewed to the Prebisch-Singer hypothesis, which holds that the price of primary products would only decline over time, relative to manufactured ones. Dead wrong, we know now, but it was in this period, “under strong political leadership backed by a highly capable bureaucracy and an economically literate media”, Australia determined to press ahead with productivity-increasing reforms, Stevens said.
“That these two phenomena occurred together was probably not entirely a coincidence,” he said, referring to the effect of pessimism on the path of its economic planning.
Besides limiting government debt and forcing a high private savings rate, Australia implemented tight financial sector regulations.
In short, today’s relative optimism in Australia is set on a foundation of past prudence. The pigeons earned their crests.
Cathy Holcombe is a Hong Kong based financial writer