Guess which country escaped recession?
ON closer inspection, a lot of the supposed “facts” we think we know about the credit crunch turn out to be nonsense. Take the widespread view that the recession is a global phenomenon, affecting every developed country. Yet Australia is a glaring exception: it has not only avoided the worst of the destruction but has not even gone into recession, which is truly astonishing and warrants closer analysis.
Although Australian GDP contracted by 0.6 per cent in the fourth quarter of 2008, it expanded by 0.4 per cent in the first quarter of 2009, a fact which has gone almost completely unnoticed in Britain. There are a number of fascinating reasons why Australia has so far escaped relatively lightly, as Gabriel Stein notes in an excellent paper published today by Lombard Street Research. One reason is that the Reserve Bank of Australia (RBA) began to hike interest rates in 2002, many years before other central banks started to realise that irrational exuberance had set in and had to be dealt with. The result is that the real, inflation-adjusted base rate, which had been negative from June 2000 to June 2001, moved up to 2 per cent in 2002, was at 3 per cent for most of 2004 and 2005 and hit almost 5 per cent by the middle of 2007.
Australia was suffering from a massive property bubble; but this brave, counter-cyclical policy of hiking rates eventually led to a slowdown in the rate of housing loan growth, from a peak of 21.9 per cent in the year to February 2004, to 12.1 per cent in August 2007 and to 7 per cent in May 2009 (since then, lending has started to grow at a faster rate again). It also had a major impact on house prices, which stopped going up so fast. Last but not least, Australians started to increase their savings rate, a process that has now been going on gradually for several years.
This shows that much higher interest rates can kill an asset price boom without the need for caps on credit or leverage or any of the other macro-prudential tools everybody keeps talking about here in London. Higher rates also gave the RBA more room for manoeuvre when the crisis broke out: since March 2008, it has slashed rates from 7.25 per cent to 3 per cent. Yet this remains among the highest rates in the world, which means it retains plenty of ammunition to cut more if required; meanwhile, the positive rates show the RBA is still committed to fighting inflation.
Australia’s banking system was also much tamer and better-behaved. Although a quarter of pre-crisis housing credit was securitised, these mortgages did not suffer from lower lending standards. The Australian equivalent to sub-prime loans accounted for just 1 per cent of total housing loans in mid-2007, compared with 13 per cent in the US. Amazingly, there have been no bank bail-outs and no state-financed recapitalisations; banks have raised capital privately.
The Australian economy still faces problems, as Stein points out. Chief among these are its dependence on commodity exports and its weak rate of productivity growth. But prospects in Australia are way better than they are here in Britain, in America or in most other developed economies.
The big lessons are that interest rates can kill off housing bubbles and that sub-prime lending never makes sense. It is vital that the Tories, the Bank of England and the FSA all learn from the Australian experiment.
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