Australia well placed to counter recessionary impact

October 8, 2008

Australian authorities have moved swiftly in the expectation that the US is heading into a long, deep recession. They intend to use the only two big weapons available - the budget and interest rates.

In the US, both of these are close to exhaustion. Official interest rates in the US are now 2 per cent and the federal budget is in deficit and deteriorating fast. In contrast, Australian official interest rates are at 7 per cent and the federal budget is in robust surplus, so there is plenty of scope to use both to stimulate domestic demand.

The Reserve Bank is expected to continue cutting interest rates. And the Rudd Government will not defend the budget surplus at the expense of growth. The Treasurer, Wayne Swan, has said he will alow the surplus to run down as revenue slows. This will, in effect, stimulate growth. Further fiscal stimulus is also possible if the situation demands.

The chief constraint in stimulating the Australian economy is not any lack of firepower but the risk of inflation. The authorites do not want to ignite a new bout of inflation by stimulating too much.

Australia appears to be better positioned to withstand the slowdown than any other developed country. In addition, while the US financial system is infested with bad and doubtful debt for which no market exists, Australian authorities are satisfied with the soundness of the domestic banking system. As the Government likes to point out, of only 20 banks in the world with a top-line AA credit rating, four are Australian.

Much depends on consumer and business confidence, which is essential to consumer spending, to bank lending and to business investment. Australian authorities will emphasise the strengths of the domestic situation.

Prime Minister Kevin Rudd said: "The bottom line is this. Strong regulation, the best regulartory system in the world, strong balance sheets on the part of our banks, as well as a strong budget situation on the part of the Australian Government means that Australia's situation in this period of global financial turbulence is the best that you could have".

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