RIPPLE EFFECT Things may be going swimmingly for Australia's economy, but political turmoil among its near neighbours could dampen sentiment.The economy after the Olympics shows little sign of slowing. Despite the dismal slide of the Aussie dollar,the economy is sprinting ahead. The question is, why?
Thanks to a big boost from the Sydney Olympics, Australia enjoyed its first trade surplus for three years in September. A bonanza of A$973 million (US$513.74 million) on the sale of broadcasting rights, and A$450 million - or A$10,000 a minute - spending by foreign visitors, helped produce a surplus of A$667 million for the month.
Even excluding the shot in the arm from the Olympics, Australia’s chronic trade deficit is narrowing. Exports jumped 8.3% in the September quarter, while imports rose only mildly. That result added to GDP growth, which hummed along at around 4.6%.
Economic forecasting is harder than usual this year. The confluence of a 10% goods and services tax (GST), an A$12 billion cut in personal income taxes, spiralling oil prices, and the Olympics, mixed a potent cocktail, which is distorting the data.
For instance, the most recent consumer price inflation (CPI) number at first glance showed a rise of an eye-popping 6.1%. However, half of that was explained by the one-off price rise effects of the GST.
Underlying inflation is probably still running within the 2-3% tolerance level of Reserve Bank Governor Ian Macfarlane. HSBC’s chief economist, John Edwards, says interest rates are now on hold for the foreseeable future. "It is now extremely difficult for the Reserve Bank to rationalise further official interest rate rises on inflation grounds," he says. That will be a considerable relief for business. Five successive rises in rates over the past year to 6.25% are beginning to bite. Overall, the economy is set to slow down.
The construction industry is in a slump, as big Olympic infrastructure projects dry up. House builders are also doing it tough, after a boom period early this year, when home buyers raced to beat the advent of the GST.
Australia is a net exporter of oil and gas. But the price of petrol is linked to the world price of the commodity, which is currently the equivalent of A$70 a barrel. Dearer prices at the pump for Australian drivers are a de facto consumption tax, and that is crimping discretionary spending. Retail sales are presently holding up, but the real test will come at Christmas.
Analysts are agreed on one thing. Growth in 2001 will be led by exports, which are rolling along, up an unprecedented 25% driven by both volume and prices.
In November, foreign exchange dealers sent the bedraggled Australian dollar down to an all-time low of US51 cents. The slide of more than 20% this year means the currency is undervalued by almost any measure, and that is making exports super competitive.
Farmers, wine growers, resource companies and car makers are the major beneficiaries.
Mining company profits got a big lift from firm world commodity prices, and have been further boosted by the benefits of receiving their revenue in US dollars. Industrial giant BHP has reported quarterly net profits up 34% to A$715 million, helped by higher prices for oil, copper iron ore and steel. About 76% of BHP’s business is conducted in US dollars - that brought a A$100 million windfall to the bottom line, despite the fact the company had hedged the currency at US57 cents.
The HSBC says "although some components of domestic demand are slowing, a strong expansion in the export sector is taking up the slack, leaving overall economic growth robust." The bank is fairly relaxed about the threat of wage-push inflation, although the report was written before the Australian Council of Trade Unions said that it planned to seek a raise for all low-paid workers.
Forecasting unit Access Economics recently lifted its GDP prediction for 2001 from 3.3% to 3.4%. Access says in its regular business outlook report "a competitive Australian dollar will ensure any slowing of output growth through 2001 will be modest at best. In fact, if the Australian dollar stays this low, output growth may not slow at all."
That begs the question of what happens if the beleaguered currency stages a sudden rebound?
During the Asian crisis, when Australia confounded the hedge fund sellers by completely sidestepping the contagion effect, the dollar shot up US8.5 cents in just seven weeks. A repeat performance would see it return to around US60 cents, where some experts believe it would still be undervalued on economic fundamentals.
An exasperated Federal Treasurer Peter Costello has just returned from a visit to New York to beat the drum for the dollar before it disappears altogether. He may have drawn the attention of investment bankers to the US Federal Reserve October paper on the world growth league table. This showed that only three nations outperformed the US in the late 1990s - Ireland, Finland and Australia.
Productivity gains in Australia have averaged 3.1% in recent years versus 2.6% in the US.
Moreover, they have been achieved through labour market reform, with further gains yet to come from being one of the biggest users of technology in the world, rather than having an IT manufacturing industry.
Australia has a better than 50-50 chance of pulling off the soft landing that the US so fervently hopes for. The wild card is the deteriorating political and economic situation among several Asian neighbours.