Australia's Strong Economy

You could be excused for thinking otherwise from observing the drastic actions of the Australian government and the Reserve Bank of Australia (RBA), but Australia's economy is one of the strongest in the world right now. While that reflects more on the weakness of other economies, than any absolute strength in Australia, Australia appears to have escaped recession so far.

Just look at the numbers:
-Business investments increased 6% during the fourth quarter of 2008.
-Private sector wages are up 5.7%, and even adjusting for inflation real wages are up some 2%.
-While total employment was stagnant in January (up just 1,200), this hides the fact that full time employment rose significantly while part time employment fell, meaning that hours worked is increasing
-Real retail sales are increasing, up 0.8% (annualized rate of more than 3%) compared to the previous quarter.
-In contrast to most other countries, the housing sector is still expanding. And while house prices have declined slightly, the decline is very small (only 3.3% during the latest year) relative to other countries and reflects largely an increase in supply rather than decline in demand.
-The previous trade deficit has now turned into a trade surplus for the last few months.

These numbers simply aren't consistent with the view that Australia is in a recession.

Regarding the last item, that is entirely a result of an improvement in Australia's terms of trade, so net exports might subtract from the headline volume GDP number that will be released soon, despite the fact that a trade deficit has been turned into a trade surplus. But GDP properly measured is clearly expanding in Australia, and even the volume measure might be positive.

But if the Australian economy is so string, why has the government introduced Keynesian stimulus packages and why has the RBA made a 180 degree reversal from its previous rate hikes and started to aggressively lower interest rates? Well, I'm not them, so I can't be sure of it, and I personally think they have over-reacted. But presumably they have wanted to pre-empt a coming downturn. Because while Australia is clearly not yet in a recession, a recession might come soon, as the decline in commodity prices starts to reduce Australian export earnings. For many of the commodities that Australia exports, the price is negotiated in annual contracts, and luckily enough for Australia they managed to lock in big price increases in June last year. Once these contracts expire, many Australian commodity exporters will probably have to agree to partially reverse some of these price increases.

So, while Australia is clearly not yet in a recession, a significant risk exists that a recession might (with emphasis on might, as there is also a good chance that it won't come) come later this year. But even if a recession comes, the Australian economy is not in as bad shape as many others, which is one reason why the badly battered Australian dollar looks undervalued at its current level of about US$0.65/A$, €0.51/A$ or 63yen/A$.