England’s cricketers could be forgiven for thinking they had arrived in a strange and mysterious land when they began their Ashes tour of Australia.
The sun was shining, the once unbeatable Australian team had lost the ability to win — and they had landed in a country where the economy is vibrant.
Whereas the Bank of England kept borrowing costs on hold in an attempt to nurture Britain’s economic recovery, the Reserve Bank of Australia surprised the financial markets by pushing up interest rates by a quarter point to 4,75% as it sought to prevent inflation from getting out of hand.
The RBA justified its move using words unlikely to be heard from the Bank of England for some time. Australia, it said, was experiencing a “large expansionary shock from the terms of trade at a time when there are relatively modest amounts of spare capacity”.
Like Germany, Australia is a beneficiary of China’s explosive growth. But, whereas Beijing needs Europe’s economic powerhouse to tool up its factories with high-tech equipment, it also needs a bountiful supply of raw materials. Australia has metals, coal and food in abundance.
In the past six years its exports to China have quadrupled, continuing to rise even during the “great recession” of 2008-2009.
China is comfortably Australia’s biggest market — accounting for almost a quarter of goods and services sold overseas — and investment has been coming in the other direction as Beijing has sought to guarantee its supply chain.
Almost all exports are primary products: iron ore, coal, copper and wool account for more than 70%.
Strong links between Australia and China
The economic links between China and Australia have become so strong, the Aussie dollar is now used by many foreign exchange dealers as a proxy for the yuan, a guide to where the Chinese currency would be trading were Beijing to remove its restrictions.
As a result, the Aussie dollar has replaced the Swiss franc as the world’s fifth most traded currency and last month, for the first time since it was allowed to float freely in the early 1980s, it went through parity against its American cousin.
The agonising in Europe and the United States about the slow pace of recovery from 2008-2009 has meant many in the West have failed to spot that Asia is booming. Gerard Lyons, the chief economist at Standard Chartered Bank, said: “We have a tale of two worlds: Asia doing well and the West doing less well. Australia is a key part of the Asian economy, but even within Asia it is one of the better performing economies because it is a commodity producer.”
Effective supervision of the banking sector had also helped, Lyons said. “The big four banks are protected from being taken over, which enables them to take a long-term view, and supervision has been very effective.”
Professor Al Rainnie, of the Curtin Business School in Perth, said the headline figures disguised some deep problems. Growth has been concentrated in certain areas: the big commodity-producing states of Western Australia and Queensland.
The more densely populated states of Victoria and New South Wales have fared less well and are being hit by the increase in mortgage rates, now running at about 7%.
Policymakers accept difficulties in setting an interest rate for the country as a whole, but see it as a lesser concern than allowing inflation currently below 3% — to take hold.
Commodity exports
A longer-term threat is that the country may become overdependent on commodity exports, particularly if booming sales to China lead to a sharply higher exchange rate.
The mining corporations are powerful, exercising the sort of political influence wielded by the media moguls — Packer, Murdoch and Bond — in the 1980s. Big commodity producers successfully mobilised against the climate change initiative proposed by the former prime minister, Kevin Rudd, who was later deposed after proposing a super tax on the profits of mining companies. “They have got the politicians by the short and curlies,” Rainnie noted.
Australia’s economic growth is expected to be about 4% this year and next, and unemployment is just above 5%.
“The country is on fire,” said Nick Parsons, a strategist at National Australia Bank. “It went into the crisis in a strong fiscal position, which allowed the government to hand a $A900 cheque to every one of the 16-million adults living in the country.
And it helps when you can dig a hole and sell to China what you find on the end of your shovel.” — Guardian News & Media 2010