This is a tale of two economies. Australia is braced for the onslaught of outright recession among its Asian trading partners, export growth is slowing, the tourist trade is struggling, and unemployment is climbing through 7%. Yet the OECD, like many private forecasters, is confident the economy is set to grow by at least 3% in 2002. Sales of luxury cars at the Sydney motor show were a record, house building is on a roll, and the stock market was the best performing in the world last year.
These paradoxes seem to restore Australia's "lucky country" label. The strong projected numbers are only possible thanks to some fortuitous circumstances that transformed weakness into strength.
One of the perceived weaknesses was being a nation of troglodytes earning a living from farms and quarries, and badly left behind in the technology revolution. That turned out to be a stroke of luck. As Reserve Bank of Australia governor Ian Macfarlare said in his quarterly report, "Because exposure to the production side of the new economy was limited, a major contractionary force at work in the US and Asia is not affecting Australia to the same extent." So Australian manufacturers were not stuck with hard-to-shift inventories, and there was no Nasdaq boom and bust to dent household wealth.
Australia has not needed to slash interest rates to the same extent as the US, but six successive cuts have reduced cash rates to 4.5% and brought home mortgages down to around 6.3%, the lowest since 1970. A year ago, the sector was in the basement, following the introduction of the GST, which made building costs 10% dearer. In one of the canny policy decisions that subsequently won him a third term at the November election, Prime Minister John Howard introduced cash subsidies of A$14,000 (US$7,263) for first home builders. That quickly revitalised the industry. Soon one in every four houses being built were for first home buyers. The size of the average mortgage has climbed 18.5% in 12 months to a record A$149,00 boosted by cheap borrowing. Home buildings approvals peaked in the third quarter, but analysts expect the impetus to last deep into 2002.
In Sydney, you can pay A$1.5 million for a house in the swish suburb of Mosman, and virtually anything you like for a ritzy harbourside penthouse. But in general, Australia is a very inexpensive place to buy a home. Despite the recent spiral, the median house price in Sydney is A$316,000, one in Melbourne goes for A$291,000 and a modest family home in Brisbane or Perth costs under A$200,000. Anyone arriving with US dollars would effectively pay half price, and could afford something much classier.
The OECD, seen as the rich countries' club, is predicting a dreadful year for its 30 industrial nation members. GDP growth is put at just 1% in 2002, the worst for 20 years. But the agency singled out consumer confidence and house construction in Australia as drivers that would enable that economy to ride out the global downturn, and enjoy 3.2% growth in the current year, and 4% in 2003.
John Edwards, chief economist of HSBC in Australia, agrees, saying "I think we might do a little better than 4% this year." Richard Martin of the Standard and Poor's rating agency, believes it was beneficial for the economy to be forced out of step with the US. "Critically, this will enable Australia to bridge the December quarter chasm, when the economies of the US and Asia will contract sharply," Martin says. The Economist magazine reported Australia was a "bright spot" in the dimming global picture.
Such unanimity of opinion is often dangerous. A reality check is in order. The export engine fuelled by an undervalued dollar has enabled Australia to achieve its best ever run of eight consecutive monthly trade surpluses. But falling demand and stronger imports will spell deficits soon.
The resilience of the big retail spenders defying storm clouds has been astonishing. They have apparently not been deterred by job insecurity, with the unemployment rate surging to a two-and- a-half-year high of more than 7%. There have been mass redundancies in financial services and telecommunications, together with a string of corporate collapses, culminating in Ansett Airlines going belly up.
However, for those who have a job, extra money from lower mortgage payments is burning a hole in shoppers' pockets, and being fanned by tumbling petrol prices.
Even the events of September 11 failed to crimp their style. A survey taken in the weeks following the attack showed an initial 9% swoon in consumer confidence. But much of that had been clawed back by November, with more respondents declaring that this was a good time to buy a major household item. Some went to extremes. The annual Sydney motor show was the most successful ever. A score of customers put deposits down on the yet-to- be-released Maserati Spyder V8 priced at A$227,500 and Mercedes car sales were 50% above normal.
A spendthrift boom often contains the seeds of its own destruction. Inflation is currently being well contained at around 2.5%, and wage increases have been moderate. However, should the economy run too hot, domestic interest rates would cease falling. A reversal of monetary policy could be on the horizon, and that would stop the real estate market in its tracks.
Most Australians do not believe a full blown recession is coming. But it has already arrived in one important industry. Fear of flying, and slimmer wallets caused the numbers of overseas tourists arriving in October to fall 12.7% to 352,000 and forward bookings are getting worse.
Inbound tourist receipts are worth an annual A$15 billion and account for more than 4% of GDP. Qantas chief CEO Geoff Dixon says international travellers have put away their passports and suitcases. Hotels that service foreign visitors are closing down. Tourism officials have persuaded the government to pay an A$150 bounty to any family taking a long-haul domestic holiday around the country.
For one reason or another, many more Australians settled for a stay-at-home Christmas.