Australia and the GFC: a pair of star-crossed lovers

Australia, a few key themes tend to spring up: success, the theories of John Maynard Keynes, and increased production.

A bit of context is in order. Firstly, Australia successfully avoided a recession during one of the most impactful global crises in decades. Secondly, John Maynard Keynes is the mind behind Keynesian economics, a school of thought supporting increased government expenditure during negative economic periods. [1] Keynes’ theories have been synonymous with global fiscal policy responses to the GFC, internationally hailed as not only the textbook standard, but the main contributing factor to the success of countries such as Australia. Australia’s fiscal response to the GFC has been so well respected that, then-treasurer Wayne Swan, was named Finance Minister of the Year by Euromoney magazine, a feat that had not been achieved since Keating in 1984. [2]

During the crisis, Swan adopted and implemented several Keynesian-inspired policies. There were the famous $900 cheques awarded to households as a direct monetary stimulus, as well as the $2.8 billion insulation program, which boosted unemployment in a turbulent time. [3] Keynesian theory argues that such policies are imperative for stimulating the economy in a time of downturn by boosting labour demand, increasing production and easing an eminent recession.

Whilst Swan played a role in the success, there were many other contributing factors of arguably greater importance. When seeking to boost the economy, governing bodies have two tools at their disposal: fiscal and monetary policy. Monetary policy refers to when a country’s central bank, namely the Reserve Bank of Australia (RBA) in Australia, manipulates the money supply circling the economy to affect the interest rate. By utilising expansionary monetary policy (i.e. lowering interest rates), the RBA can affect investment levels and encourage spending, whilst discouraging savings. A tool strongly advocated for by the late economist Milton Friedman, monetary policy is an effective way of stimulating the economy in anticipation of a downturn. [4] In September 2007, the RBA used expansionary monetary policy as an immediate response to the GFC, decreasing the official interest rates from 7.25% to 3%. It was an emergency measure that had a considerable effect on the Australian recovery, with claims that it was the most influential measure taken during the period. [5]

Can we attribute all success to the government?

Clearly, government intervention had some considerable effect on Australia’s ability to recover from the GFC. However, these policies only translated into success due to favourable conditions. Fiscal and monetary policies are costly, with the former requiring a government budget capable of handling the shock, and the latter requiring a high enough interest rate for it to be lowered. Fortunately, Australia’s governing bodies stood to capitalise on both situations, much to the envy of other GFC-afflicted countries. However, these were not the only favourable conditions Australia found itself in.

When the GFC hit, we were experiencing a number of positive economic conditions. Notably, these included Australia’s mining boom, housing boom and the presence of a flourishing trade partner.

China’s economic strength during this period was also a large contributor to Australia’s success. The start of the GFC in 2007 coincided with a historical period of China’s economic growth, reaching a peak of around 14% per annum Gross Domestic Product (GDP) growth. [6]

China was industrialising at an incredible rate and needed plenty of Australia’s raw materials. With China being Australia’s leading trade partner, accounting for over one quarter of all Australian exports mainly consisting of primary resources such as ore, Australia was well positioned to capitalise on China’s industrial boom.

The mining boom was imperative to the Australian success during this period. A consequence of the boom was increased demand from China for raw materials, leading to a surge in both the price and quantity of resource exports from Australia. The critical importance of both mining and China for the Australian economy during the GFC can be seen from the proportion of energy and mining exports to China as a percentage of total Australian merchandise exports. This figure rose from 57% in 2007 to around 80% in 2009, [7] representative of both increased mining exports and decreased demand for non-mining exports by GFC-affected nations.

Furthermore, the housing boom that began just prior to the GFC was essential in maintaining personal capital value. The housing boom caused house prices in Australia’s capital cities to increase by 23% between the beginning of 2006 and the end of 2007. This housing market price increase led to increased foreign investment, as Australia’s rate of return was comparatively higher to international levels. This causes the monetary policy shift to have an even larger impact. The housing boom also helped Australian households, spiking asset value and therefore wealth. This has contributed towards a reasonable period of positive investment expectations towards Australian property.

It is due to these favourable conditions that the GFC never impacted Australia to the extent that has been seen in other countries. When looking back, emphasis should be placed on the broader scope of economic factors rather than attributing success merely to Keynesian policies and the efforts of the Rudd Government. As such, the addition of the following themes to the three introduced in the first paragraph would provide for more well-rounded discussion of Australia and the GFC: a robust government budget and interest rate, the role of China, the housing boom and Milton Friedman.

Kyneton is completing his Honours year in Economics at Monash. He loves discussing public policy and its unintended consequences.

[1] Keynes, J.M., 1937. The general theory of employment. The Quarterly Journal of Economics, 51(2), pp.209-223.

[2] Thompson, J 2011, Swan named world’s best treasurer, ABC News available at http://www.abc.net.au/news/2011-09-21/swan-named-best-treasurer/2908654

[3] Rudd, K 2009, “The global financial crisis.” Monthly, The Feb 2009 (2009): 20.

[4] Friedman, M., 1982. Monetary policy: Theory and practice. Journal of Money, Credit and Banking, 14(1), pp.98-118.

[5] Australian Government Treasury, 2011 THE AUSTRALIAN ECONOMY AND THE GLOBAL DOWNTURN PART 1: REASONS FOR RESILIENCE¸ Australian Government, Economic Roundup Issue 2.

[6] Trading Economics, 2016, China GDP Growth 1996-2012, data obtained from National Bureau of Statistics of China in Beijing.

[7] Priestly, Michael 2010, Australia, China and the GFC, Parliament of Australia available at http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook43p/australiachinagfc

Image: ‘Picture of Curragh’s Dragline 3’ by David Drew, http://bit.ly/2rAzBfA. Licence at https://creativecommons.org/licenses/by-sa/3.0.