Stock markets around the world have plunged as bond markets rallied, signalling a high level of anxiety among investors. This comes after China’s recent devaluation of their currency, and the escalation of trade tensions between them and the USA. At the same time Germany, Europe’s largest economy, has announced that it is on its way into a recession. Investors are responding by preparing for more economic turbulence.
While none of these events bode well for any economy that’s integrated into global markets, signals are mixed for Australia. With a recovering property market, high labour participation, and a government that already implemented stimulus measures in July, the country is better prepared for adversity than most. These more positive signals offer businesses hope of avoiding some of the difficulties that other economies are increasingly likely to face in the coming months.
Property markets are in recovery
Australian property markets began to show signs of recovery in July, with homes in Sydney increasing in value for the first time in months. This recovery has continued for the past 6 weeks, prompting cautious optimism among economists. A strong housing market is helpful in dealing with recessions, because it plays an important role in the behaviour of small businesses.
Small business owners often borrow against the value of their homes, which means that their ability to access financing is directly dependent on the value of their homes. When home prices fell, many small businesses found themselves in financial trouble. With home equities shrinking and debt levels remaining the same, lenders began to reject attempts to borrow more, demanding repayment of outstanding loans instead. This had a chilling effect on those businesses’ ability to grow by limiting their access to funds.
The recovery of the housing market allows these SMEs to begin to borrow again, and to pursue growth more aggressively. This, in turn, will drive increased productivity and jobs growth, which will serve to at least partially counteract an incoming slowdown.
Labour participation is high
Besides a healthy small business sector, Australia enjoys low unemployment along with a high labour participation rate. The total number of employed people has grown 2.6 per cent in the past year, indicating a strong and resilient economy. Moreover, most of the new jobs created in that time frame were full-time positions.
What this means is that consumers are employed and maintaining their own purchasing power for the time being. This will keep domestic spending growth up in the near term, buffering against incoming turbulence from the global economy. Australia is currently in a position of relative strength, which will give the country the time and opportunity to react in the face of any more serious developments.
Currency devaluation is coming to the rescue
The Australian dollar has fallen to its lowest rate against the US dollar in a decade. As a result, Australian exports are cheaper, and much more attractive to foreign buyers. This is already providing a significant enormous boost to the mining and agricultural sectors.
Currency depreciation, however, is a double-edged sword. With a weaker AUD, businesses who rely on foreign suppliers also face higher supply costs. Fortunately, China’s much-feared weakening of the yuan actually helps in this situation. Since China’s currency has also weakened during the same timeframe, so Australian businesses who rely on Chinese suppliers don’t face the same price increases as they otherwise would. This is important, because it means that the businesses with more complex foreign supply chains can also price their products more competitively on foreign markets.
The government is taking mitigatory measures
The Australian government, already primed due to the housing slump, is taking the possibility of an economic downturn very seriously. This includes several stimulus measures that are already included in the budgetary policy, most notably a significant amount of infrastructure spending. In July, the Senate also passed a $158 billion income tax cut package, which not only cuts taxes, but also includes a lump sum “offset” payment of up to $530. Part-time workers will receive smaller amounts, while people earning over $90,000 will receive gradually smaller payments dependent upon their income level.
These measures are designed to boost consumer spending, while creating jobs at a time when external forces might otherwise drive up unemployment. While they were designed to help the country manage its bursting property bubble, they will also serve to rally the economy in the event of any further. Combined with the current state of its economy, and the declining value of the AUD, the country is much better equipped than most to weather an economic downturn.