Australia’s economy vulnerable: IMF

By Sid Astbury, dpa

SYDNEY — What is not to love about the Australian economy? Employment is up, inflation is steady and the budget is poised to swing back into the black on the back of the best terms of trade in 50 years. “The Australian economy is the envy of the developed world,” beamed Treasurer Wayne Swan. “What we’ve got here is very strict fiscal discipline.”

Many in the private sector share his joy in the Australian economy, which global bank HSBC forecasts to grow at above 4 percent next year.

“Our banking system is in great shape,” JP Morgan investment bank economist Stephen Walters said. “Our fiscal position is substantially better than just about every other economy.”

Not so fast, the International Monetary Fund (IMF) argued in its latest six-monthly report. The IMF warned of the budget moving from deficit to surplus and then quickly back to deficit, if demand falters for iron ore, coal and other top exports.

“If the global recovery stalls and Chinese demand for commodities declines, Australia’s terms of trade could fall sharply,” the IMF said. International ratings agency Standard & Poor’s has also sounded the alarm, flagging a softening of demand from China that “could cause a sharp decline in the Australian economy.” Swan says that the terms of trade, the ratio between what a country’s exports are worth and what its imports cost, are likely to stay at more than double their long-term average.

Big mineral exporters like Brazil and South Africa are ramping up production. While Swan foresees a gentle decline in export prices, others fret about a shock as the terms of trade are pegged back. Chris Richardson, director of consultancy Access Economics Pty Limited, predicts that the budget will be back in deficit by 2012. “The budget used to depend on a much wider range of indicators,” he said. “These days, it very much comes with a Made in China stamp.”

Richardson predicts that by 2014, worldwide iron ore production will be up by 50 percent and buyers in China are busy bargaining down prices.

The strength of the Australian dollar, now trading at a two-year high against the greenback and tipped to reach parity soon, is harming agricultural and manufacturing exports. The rising Aussie dollar is also frightening away foreign tourists and the overseas students who have raised higher education to the nation’s third-largest source of foreign earnings after coal and iron ore.

Last year the high dollar helped send more Australians on holidays abroad than the number of foreigners who visited Australia. There is a two-speed economy: a rip-roaring mining sector in the east and west of the continent and a somnolent middle where manufacturers and retailers struggle and the service sector lags.

When the global financial crisis was raging, fiscal policy and monetary policy worked in tandem to pull Australia through.

Now, fiscal and monetary policy are at odds, with Swan pumping money into the economy to get faster growth while the Reserve Bank of Australia (RBA) jacks up interest rates to ward off inflation as the economy pushes up against capacity constraints. Before the global financial crisis dampened the resources boom in 2008, a surplus of AU$20 billion (US$18 billion) and interest rates above 7 percent combined to anchor the economy. This year, with a AU$40-billion deficit and the cost of borrowing below 5 percent, the risks of boom to bust mean interest rates are likely to rise. Some economists argue that if Swan stopped pumping money into the economy though stimulus spending programs, the RBA would not need to ramp up its rates so much.

Their view is that higher interest rates exacerbate the difficulties of keeping a two-speed economy on the rails.