Australia is in a good position to avoid the global financial crisis and should continue to use its “lucky” position to shield against further economic shocks, the central bank governor says.
Australia has not had a recession since the early 1990s and unlike many developed economies avoided a severe economic downturn during the global financial crisis (GFC) that started in 2008.
In a speech entitled “The Lucky Country”, Reserve Bank of Australia (RBA) governor Glenn Stevens said many foreign observers had remarked about the nations’s economic and financial resilience.
“It is slowly becoming better recognised that the Australian economy’s relative performance, against a very turbulent international background, has been remarkably good,” Mr Stevens told an Anika Foundation lunch on Tuesday.
He outlined why Australia avoided a recession during the GFC.
Mr Stevens said the first factor was that Australia’s banks went into the crisis in reasonable shape.
There were some poor lending decisions, he said, but among the major institution these issues were manageable.
The second factor he outlined was that the federal government was in a position to stimulate the economy and did so “promptly and decisively”.
A surging Chinese economy saw a large demand for energy and resources, which pushed Australia’s terms of trade to all-time highs and was a third factor why the Australian economy kept growing.
The fourth was the sharp fall in the Australian dollar at the end of 2008, making the price of our exports more competitive.
Mr Steven said these factors did not happen through pure luck but from decisions by governments, financial institutions and regulators.
“Our natural resource endowment has provided a basis for the country to ride the boom in Asian resource demand,” he said.
“We did not create that, though we still have to muster the capability to take sustained advantage of it.
“You don’t suddenly acquire the credibility needed to ease monetary policy aggressively while the exchange rate is heading down rapidly.
“Authorities in lots of countries would not feel they could do that.”
The RBA governor said future economic shocks that would hurt Australia could happen in a number of ways, such as a severe economic slowdown in China and a collapse in dwelling prices.
“The ingredients we would look for as signalling an imminent crash seem, if anything, less in evidence now than five years ago,” he said.
“By the same token there are things we can do to improve our prospects or, if you will, to make a bit of our own future luck,” he said.
“Some of the adjustments we have been seeing, as awkward as they might seem, are actually strengthening resilience to possible future shocks.
“Higher more normal rates of household saving, a more sober attitude towards debt, a re-orientation of banks funding, and a period of dwelling prices not moving much come into this category,” Mr Stevens said.
