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 on Friday. The sun was shining, the once unbeatable Australian team has lost the ability to win — and they landed in a country where the economy is vibrant.
While the Bank of England kept borrowing costs on hold this week in an attempt to nurture Britain’s economic recovery, the Reserve Bank of Australia (RBA) surprised the financial markets by pushing up interest rates by a quarter point to 4.75 percent 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 while 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. 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 percent.
The economic links between China and Australia have become so strong that the Australian 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 Australian 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 US cousin.
The agonizing in Europe and the US 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 at the moment: 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 added.
“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,” he said.
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 percent.
Policymakers accept difficulties in setting an interest rate for the country as a whole, but see that as a lesser concern than allowing inflation — currently below 3 percent — to take hold. A longer-term threat is that the country may become over-dependent on commodity exports, particularly if booming sales to China lead to a sharply higher exchange rate.
The mining corporations are strong and powerful, exercising the sort of political influence wielded by the media moguls — Kerry Packer, Rupert Murdoch and Alan Bond — in the 1980s. The big commodity producers successfully mobilized against the climate change initiative proposed by former Australian 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 said.
Australia’s economic growth is expected to be about 4 percent this year and next, while unemployment is just above 5 percent.
“The country is on fire,” said Nick Parsons, strategist at National Australia Bank. “It went into the crisis with a very strong fiscal position, which allowed the government to hand a A$900 (US$913) check 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.”
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