Australia is facing the current global economic turmoil from a position of strength, with low unemployment, a strong banking system and a big investment pipeline, Treasurer Wayne Swan said.
“The international economy has entered a dangerous new phase,” Swan wrote in his weekly e-mailed economic note yesterday. Australia’s “successful response to the global financial crisis and record of economic reform means our fundamentals today are rock solid.”
Global markets are in turmoil on fears that a default by Greece will exacerbate an 18-month debt crisis and tip Europe and the global economy back into recession. The International Monetary Fund cut its forecast for global economic growth this month and predicted “severe” repercussions if Europe fails to contain its debt crisis or if U.S. policy makers reach an impasse over a fiscal plan.
European governments are exploring speeding the start of a permanent rescue fund for their cash-strapped economies and senior finance officials will examine next week the cost advantages of setting up the fund, known as the European Stability Mechanism, a year earlier than its currently planned July 2013 start, according to a document prepared for the meetings and obtained by Bloomberg News.
David Murray, chairman of Australia’s Future Fund, attributed the sovereign debt crisis in Europe to governments’ lack of understanding and discipline.
“This was a failure of government to understand the realities of financial markets and of fiscal discipline in their own countries,” Murray, who oversees the government-owned entity controlling A$75 billion ($73 billion) of assets, said on the Australian Broadcasting Corp.’s “Inside Business” program yesterday. “What this says to me is that people elected to political life have far too little an understanding of the limits of debt than they should have.”
Australia has its own problems, with the country likely to exacerbate the risks from a two-speed economy if it doesn’t cut its level of indebtedness to other nations, Murray said.
“This is not a time when state and federal governments should be becoming more highly indebted,” he said. “And they are. So that is a weakness of fiscal policy in Australia and that’s holding back development and making the so-called Dutch Disease risk higher than it need be.”
Australia’s economy is benefiting from demand from developing nations including China and India for iron ore, coal and natural gas, even as other industries including tourism, education and manufacturing struggle. The so-called two-speed economy has prompted economists to debate whether Australia is suffering “Dutch Disease,” whereby companies extracting natural resources are prosperous while other industries are wiped out.
The nation’s gross domestic product expanded more than economists forecast last quarter, driven by rising consumer spending and a rebound in exports after natural disasters disrupted coal mining at the start of the year. The economy will grow by 1.8 percent this year, the Washington-based IMF said last week.
“Major economies need to deal with the current challenges with the same determination that saw us stare down the global financial crisis,” Swan wrote in his note from Washington, where he attended meetings of the Group of 20 finance ministers, the IMF and the World Bank. “While the Australian economy has grown over 5 percent since the crisis struck, many of our peers still haven’t made up the ground they lost.”
U.S. consumer spending probably slowed, growing 0.2 in August, after growing 0.8 percent in July, according to the median estimate of 63 economists in a Bloomberg News survey.
The U.S. economy will expand 1.5 percent this year, and Europe 1.6 percent, assuming volatility in financial markets doesn’t worsen and U.S. authorities agree on a fiscal plan that both supports the economy and outlines fiscal consolidation over the medium term, the IMF said.
A deadlock in the U.S. Congress over extending the nation’s debt limit and trimming budget limits brought the world’s biggest economy to the brink of default on July 31.
“The crisis has now entered a new ‘political phase’ with markets calling for swift action by policy makers,” Swan said. “Even though we are likely to see bouts of instability continue for some time to come, we need to remember that our situation couldn’t be more different to many of our peers.”
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