Mining iron ore in Port Hedland, Australia. Money from the country’s commodities boom could protect it from future shocks (photo: Tim Wimbourne/Corbis)
ECONOMIC HEALTH CHECK
Australia’s recovery from the global downturn has been driven by a mining boom and strong demand for its natural resources from emerging Asia. This has provided the Commonwealth government with the means to save for future downturns, and meet the growing costs of an aging society and rising health care expenses.
“This is a really historic opportunity for Australia. Commodity prices have not been as high for a very long time,” said Ray Brooks, the IMF’s mission chief for Australia. “It now needs to make the most of its situation and set itself up for the future,” he added.
Australia’s ‘enviable’ economy
Australia’s economic performance since the global financial crisis has been “enviable,” according to the IMF economists who drew up the annual assessment.
It was one of the few advanced economies to avoid falling into recession—a reflection of its strong position at the start of the crisis, a supportive macro policy response, a healthy banking system, and a flexible exchange rate, as well as robust demand from Asia.
Extraordinarily strong demand for Australian coal and iron, particularly from China’s steel mills, has pushed the country’s terms of trade to a 60-year high.
Australia’s real GDP growth is expected to pick up to 3½ percent next year after slowing to 2 percent in 2011. Growth this year was hampered by a series of natural disasters when Queensland and Western Australia were hit by cyclones and extreme flooding, which impacted exports of coal and iron ore that make up about one-third of the country’s exports.
The large rise in Australia’s terms of trade over the last decade has increased the country’s national income and improved the current account balance to about 2½ percent of GDP in the first half of 2011.
The near-term macroeconomic policy mix
The Reserve Bank of Australia has been withdrawing its macroeconomic stimulus earlier than most other advanced countries’ central banks, but has held rates at 4¾ percent since November 2010, because of uncertainty about the global outlook and the impact of natural disasters on economic activity. Given increased uncertainties about the global outlook, the pause in monetary policy tightening is appropriate, say IMF economists.
If, however, the recovery remains on track, interest rates would need to be raised further to ward off the threat of inflation, IMF economists advised in their report. “An exit from budget deficits is needed to increase fiscal space and support monetary policy,” said the report.
The government is strongly committed to an ambitious plan to return the budget to surplus by 2012/13. It plans to limit real spending growth to 2 percent a year, on average, while the mining boom continues to support growth.
The report suggests that the economic outlook for Australia remains favorable despite the recent uncertainty on global financial markets. But risks remain. These include a stalling global recovery, and faltering Asian growth which would impact the demand for commodities. The report suggests that funding markets could also be disrupted by concerns about sovereign debt in advanced economies.
