Australia ‘Fiscal Straitjacket’ Poses Growth Risk, JPMorgan Says

Australia has little fiscal room to cushion a downturn should the global economy retrench, said Stephen Walters of JPMorgan Chase & Co., the only economist to predict the nation’s first interest-rate increase in 2009.

“Key risks to Australia’s outlook still loom large,” Sydney-based Walters wrote in a report today. Among the risks to the only major developed economy to avoid the 2009 global recession are high household debt, slowing productivity growth, a dependence on Chinese demand and Prime Minister Julia Gillard’s pledge to end budget deficits in 2013.

While the central bank has “room to move should growth falter,” government officials “have donned a fiscal straitjacket by unwisely and implausibly promising a budget surplus in the next fiscal year,” Walters wrote. “This requires an abrupt fiscal adjustment that officials are politically bound to deliver.”

Reserve Bank Governor Glenn Stevens reduced borrowing costs in November and December as inflation decelerated and Europe’s escalating debt crisis threatened commodity prices that propel Australia’s growth. The nation’s benchmark rate is 4.25 percent, compared with key rates near zero in the U.S. and Japan, and the euro area’s 1 percent.

Driving Australia’s gross domestic product are exports of iron ore and coal. The nation sends about a quarter of its overseas shipments to China, the world’s second-largest economy, whose largest export market, in turn, is Europe.

China Dependence

“Australian trade is tied more than ever to the fortunes of China,” Walters said. The nation’s China-driven commodity boom “masked productivity growth slipping well below the OECD average, owing partly to a deliberate, policy-induced draining of flexibility from the labor market,” he said.

Commodity prices measured by a central bank gauge declined 2.5 percent in local currency terms in December from a month earlier, as the export prices of coking coal and iron ore slid.

Days lost to strikes have risen to a seven-year high as workers at BHP Billiton Ltd. (BHP), the world’s biggest miner, and Qantas Airways Ltd. stepped up campaigns for higher pay and job security. The current industrial laws were introduced in 2009 as the Labor Party fulfilled one of the key pledges it made before winning power at the 2007 election.

The Australian dollar climbed 3.1 percent against its U.S. counterpart in the past month, after reaching a record $1.1081 in July. Pressure from the currency’s strength has hurt non- resource related companies and the unemployment rate advanced in November to 5.3 percent, matching the highest level of 2011.

2009 Call

Walters predicted the central bank’s unexpected decision in October 2009 to raise the benchmark rate from a half-century low as the economy rebounded on Chinese demand for Australian resources.

That increase was the first of seven Stevens made through November 2010 aimed at tempering an increase in consumer debt, which more than tripled in the past 20 years to 150.8 percent of disposable income in the third quarter last year, according to RBA data.

“Household spending probably will expand at its slowest pace in three years during 2012,” Walters said in today’s report.

“Without some necessary adjustments over time, the next recession, when it inevitably arrives, could be very painful,” Walters said. “For now, we have penciled in another year of trend-like growth for 2013, too, by which time the ‘lucky’ economy will have logged 22 consecutive years without a recession.”

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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