Australia: A Timely Upturn for Canberra

Australia's economy has taken a turn for the better, which is especially welcomed by the conservative coalition of Prime Minister John Howard. Facing expected elections by yearend, his government trails the opposition Labor Party and its leader, Kim Beazley, in the polls.

The polls register a response to the unpopular 10% goods-and-services tax (GST) imposed by the government last July and its impact on the economy. The GST's jolt to housing and consumer spending led to an unannualized 0.6% drop in fourth-quarter real gross domestic product, raising fears that the economy had fallen into a recession.

But in a surprisingly strong rebound that assuaged those worries, first-quarter real GDP jumped 1.1%, as consumer spending surged. To soften the GST's initial blow, the government had paired the levy with a tax cut that the majority of households chose to save--until now.

Housing also is set to recover. Home-loan approvals rose in April, after a March gain that was the largest in nine years. Because the GST taxed building materials for the first time, housing activity went from boom to bust, temporarily depressing overall growth. The economy grew at only a 0.4% annual rate in the second half of 2000, but excluding housing, growth was a healthy 4.3%, according to economists at J.P. Morgan Chase & Co.

Other growth fundamentals are favorable: The Reserve Bank of Australia cut interest rates aggressively earlier this year. The cheap Aussie dollar supports exports, and budget policy is stimulative. Plus, first-quarter GDP rose despite a huge drag from inventory liquidation, which clears the way for future output gains.

Still, the economy--and the government--may not be out of the woods. The jobless rate rose to 6.9% in May, a 20-month high, and is expected to pierce 7% as elections near. But the biggest threat lies offshore. Australia's commodity-intensive economy is dependent on exports, some 60% of which go to Asia. Asian growth is slowing, however, and Japan appears to be in a recession again.

By James C. Cooper & Kathleen Madigan

    Before it's here, it's on the Bloomberg Terminal.