Australia | Mar 31 2009
By Chris Shaw
In some ways the Australian economy has acted the same as most other economies in the world during the global financial crisis in that the pace of economic activity has slowed but as Commonwealth Bank chief economist Michael Blythe points out, what sets Australia apart is the flexibility of the economy, which has kept the slowdown here much milder than elsewhere.
As evidence of this he notes International Monetary Fund (IMF) figures show while the Australian economy contracted by around 2% in the December quarter last year global growth fell by closer to 5%, with advanced economies in general showing an average decline in growth of more than 6% for the period.
In Blythe’s view this is because the Australian economy has proven to be far more flexible in terms of how it has adapted to the new conditions. An example is the quick change by policy makers to adopt more expansionary policies quickly in the face of the crisis and ahead of any real weakness in actual economic data.
As Blythe notes, the start of the current recession saw a negative real cash rate (interest rates adjusted for the level of inflation), while at the onset of previous downturns in 1982, 1990 and 2000 real cash rates were still at restrictive levels.
Labour market flexibility offers another example, Blythe pointing out while companies in Australia have largely stopped hiring given current conditions, they are also attempting to retain their existing workforce, helped in part by falling real labour costs and reductions in hours worked.
Blythe notes households have also adjusted by changing spending patterns to focus on reducing debt rather than incurring additional liabilities and boosting savings levels, while businesses also adapted by cutting production and inventory levels.
While this had a negative impact on growth in the December quarter, the fact inventories to sales are now well below average means future sales activity will require new production to be satisfied, which again gives businesses greater flexibility in terms of meeting customer needs and maximising returns.
Even the currency has both provided and exhibited some flexibility, Blythe pointing out the drop from its peak levels of last year has kept Australian exports competitive in the downturn and at the same time the Aussie dollar has provided a buffer for Australian incomes given the falls in commodity prices.