How are we placed?

Animal spirits or rational economics – can exporters ride out the storm? TIM HARCOURT This blog first appeared 10 November 2008


What a rollercoaster ride it’s been in the past week or so. The events are so unprecedented that they have now entered the realms of psychology rather than economics.


The great British economist John Maynard Keynes once famously coined the phrase “animal spirits” to describe the behaviour of otherwise rational human beings in markets, and we’re certainly seeing a herd mentality in this bear market after the bulls had it there own way for a long time.


In a very short space of time, the global credit crunch has had a dramatic impact on share prices, liquidity and exchange rates.


But how has this affected the Australian economy? Of course, we are not immune here – no country really is – but Australia, more than most developed economies, is in a strong position to ride out the storm.


Why is this so? There are several reasons. Some are due to good fortune, others due to a quarter of a century of successful economic reform.


First, the Australian economy is in a strong position with positive economic growth prospects (still in positive territory over the coming year according to International Monetary Fund forecasts), low unemployment (4.3%, seasonally adjusted according to the latest Australian Bureau of Statistics data), a strong budget surplus and banks that have healthy balance sheets by global standards.


Second, Australia’s export diversity is also in our favour. Australia’s share of good exports to developing countries has risen from 53% compared to 43% 10 years ago. Australia’s trade action is now occurring outside the G7 and given that the developing world is increasing its influence in terms of contributions to global GDP. To date, the emerging markets have been less affected by the credit crisis relative to the US and Europe.


Third, Australia’s economic foundations have made us an attractive market for foreign direct investment (FDI) and our own financial services sector is also strengthening in its own right. Australia’s financial markets have combined assets of more than $4.2 trillion and the world’s fourth largest pool of funds under management globally (which now exceeds $1.2 trillion).


Finally, Australia’s economic institutions from financial regulation to the labour market have placed us in a good position. We’ve dealt with our own financial weaknesses before with the state banks and our own external crises (like the Asian financial crisis of 1997) and learnt from experience.


We’ve also seen the benefits of the floating exchange rate regime both in 1997 and now, where the Australian dollar takes on the burden of adjustment rather than the whole economy. One price adjusts instead of the whole range of prices and quantities in the domestic economy.


One institutional reform we should also be grateful for is the independence of our central bank, the Reserve Bank of Australia (RBA). And it is significant that the RBA was the first to act with a lowering of the cash rate by a full percentage point – a move that was followed by central banks around the world – and the lastest reduction.


However, there is a reason to be concerned on the export front, as credit is likely to be restricted in this uncertain environment. This may put exporters at a disadvantage as Austrade research shows that lack of finance is a major barrier to exporting, and exporting small and medium enterprises (SMEs) are less likely to receive credit than other SMEs.


However, mitigating this constraint is the evidence that exporters are, on average, more profitable than other businesses and they grow faster, are more productive and provide more job security than other businesses.


In addition, the lower Australian dollar will assist the nominal competitiveness of exporters and the relative attractiveness of Australia as a target for FDI.


Australian exporters successfully dealt with the Asian financial crisis of 1997-99 and the dot-com crash of 2001 due to their own endurance, innovation and ability to forge lasting business relationships and the flexibility of the exchange rate to take on the burden of adjustment to insulate the Australian economy.


With the credit crunch we are in uncharted waters, but the hard work of economic reform, our proximity to Asia – particularly China and India, even given some signs of slowing – and the benefit of experience with past crises, means Australian exporters can have some confidence that they can ride out the storm.




Tim Harcourt is chief economist of the Australian Trade Commission and author of The Airport Economist:


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