Australia: Keeping a Recession at Bay

While the rest of the world braces for a recessionary 2002, Australian policymakers seem confident that their nation can avoid a downturn next year.

Certainly, Australia remains one of the world's fastest growing economies. In the third quarter, real gross domestic product rose at a 4.4% annual rate. The gain was led by a surge in homebuilding, thanks to low mortgage rates and a large subsidy program for first-time buyers. Consumer spending also rose, but business investment was flat, and exports--one-fifth of the economy--fell 2.5%. Exports have weakened now that Australia's two major markets, Japan and the U.S., are in recessions.

The fourth-quarter data follow the same mix. Retail sales increased in October, and December consumer confidence was up strongly. But the tourism industry is extremely weak, business loans are down, and exports were flat in October. The economy may expand by 1% this quarter, which would put real GDP growth for 2001 at about 2.5%.

Capital spending may turn around in 2002, judging by a survey of businesses showing a planned rise in capital budgets. In addition, policymakers are counting on the fiscal and monetary stimulus already in place to bolster growth next year. The Reserve Bank of Australia has cut short-term interest rates six times this year, including a quarter-point cut on Dec. 5. The overnight bank rate is now 4.25%, a 28-year low.

On Dec. 6, RBA Governor Ian MacFarlane said that the drags from falling exports and earnings and an inventory adjustment are "not big enough by themselves to cause a recession." He also said that if the global slowdown worsens, the bank "will be prepared to adjust monetary policy accordingly." Australian Treasurer Peter Costello has said that, in addition to the homebuying program, fiscal policy stands ready to help out.

Further policy stimulus will likely be needed. A global recession means Australia can't depend on its important export sector to fuel growth. Instead, rising home-grown demand will be crucial to skirt a recession next year.

By James C. Cooper & Kathleen Madigan

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