Bad News for the Australian Economy…What?

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The Australian economy received three pieces of bad news recently, but that does not mean that the sky is falling in.

  • Net foreign debt is now at $967 billion; that’s up 10 per cent from the $871 billion deficit in March.
  • A sharp fall in national income has all but obliterated economic growth delivering headline growth of just 0.2 per cent.
  • The Australian dollar fell below US70c

Judging by the media headlines, all this tells us that we are all doomed, we should sell all our assets and hide the cash under a mattress.  But Australia has a long history of adapting to adversity, who remembers the:

  • Asian crisis
  • Dot com bubble
  • GFC

None were an economic disaster for Australia, primarily due to a balanced economy, limited debt and a flexible exchange rate.

Certainly, our debt position is not as strong as it used to be, but we still have other weapons in our armoury.

However, recent data indicates that these capital inflows are being used to prop up Australia’s day-to-day consumption rather than investing in our economy.  Year-on-year capex is down by 10 per cent.

Despite Prime Minister’s avowed intent of becoming the ‘infrastructure Prime Minister’, not much is happening.

I would argue that that is a mere side-show and that the inherent stabilisers in our economy will see us through – even if not on a stellar trajectory.  Despite, the stereotype, Australia is not a one-trick-pony; as the resources boom comes off, other sectors will beef up.  Particularly, I would argue, those that will benefit from a weaker $A:

  • Agriculture
  • Tourism
  • Education

Against the $US the $A is still about 18 per cent above the low it set in 1986, when persistent large current account deficits prompted Paul Keating to declare that Australia was in danger of becoming a banana republic. On a trade-weighted basis, it is two thirds higher now than it was then.

It is five per cent and 12 per cent higher against the $US than it was in 1997 and 1998 during the Asian financial crisis, and on trade weighted terms 29 per cent and 24 per cent higher.

It is probably true that our current political leaders on both sides lack the courage to face up to the structural challenges our economy faces, but thankfully, our economic fundamentals are strong enough to keep going, regardless.

In 2013, a budget standoff between President Obama and Congress led to a prolonged shutdown of the US government – yet most observers see the US economy going from strength-to-strength

In 2011, Belgium went 589 days without a government.  Yet things kept ticking over such that Greece, Italy, Spain and Portugal are Europe’s economic concerns

A strong argument can be made that we are living beyond our means.  But that does not mean that it can’t be fixed.

Graeme Salt – National Client Finance Manager, Chan & Naylor Finance Australia

www.chan-naylor.com.au

 

Graeme Salt

Disclaimer: This article contains general information. Before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.

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