Global Economics

Aussies Vote, Boom Continues


John Howard's conservatives may lose to Labor Nov. 24, but it won't be due to the economy, which is riding high on commodities and China trade

Australians will go to the polls on Nov. 24 with the choice of voting out a federal government that during its 10 years in power has presided over one of the strongest sustained periods of economic growth in the nation's history. Somewhat strangely, many Aussies are in a mood to do so. Opinion polls show people have grown tired of the conservative government, led by veteran Prime Minister John Howard. The latest polling from Roy Morgan Research showed just 44% of voters support Howard's Liberal Party, compared with 56% support for the opposition, the Australian Labor Party.

Australians seem dissatisfied over rising interest rates and recent changes to workers' rights. Following the latest rate hike by the Reserve Bank of Australia on Nov. 7, the benchmark rate is at 6.75%, the highest in 11 years. The government has also this year introduced controversial changes to workplace laws, abolishing some conditions for lower-paid workers. These issues have combined with concerns about Howard's support for U.S. President George W. Bush on issues such as global climate change and Australia's role in the war in Iraq to sour Howard's previously strong popularity. Australia has 1,000 troops in Iraq, and Howard has supported Bush's opposition to the Kyoto treaty.

As a result, Howard is getting only marginal benefit from the strong performance of the Australian economy. The country is in the midst of an unprecedented boom, fueled largely by increasing demand from China and India for Australian exports of minerals. Australia is in its 16th consecutive year of strong economic expansion, with gross domestic product growth for the year ended in June, 2007, of 4.3%. The unemployment rate is just 4.3%. The mining boom has also led to some enormous gains in the stock prices of Australian resources companies, and provided the platform for Anglo-Australian giant BHP Billiton's (BHP) proposed $140 billion takeover of archrival Rio Tinto (RTP).

Mining Exports Lead Broad Growth

Whether that dissatisfaction delivers the ALP the additional 12 seats it needs in the lower house of Parliament to form a majority government will not be known until after Nov. 24. But whichever party holds power, it will be the insatiable demand of the Chinese economy for Australian mineral commodities that will have the strongest bearing on the nation's prosperity. China overtook the U.S. as Australia's second strongest trading partner in 2005. It accounts for nearly $21 billion in Australian exports, and will most likely overtake Japan to gain the No. 1 position before 2012. Whereas Australian exporters once suffered from the tyranny of distance from the world's markets, today Australia is benefiting from residing in the same time zone as its fastest-growing trading partner. "We seem to be in the right place at the right time," says the Australian Trade Commission's chief economist, Tim Harcourt.

Rising global commodity prices have buoyed Australia's mining sector to generate record income, despite only modest increases in actual output. Price increases have had a trickle-down effect into the economy, while the federal government has benefited from additional company tax revenue. ANZ Bank (ANZ) estimates that the 40% improvement in the value of Australia's exports in comparison to its imports over the past four years has lifted Australia's disposable income relative to the growth in Australia's output by an average of 1.25% per annum. This compares to an average of just under 3.5% annual growth over the same period. Overall, the ASX 200 index, which tracks Australia's 200 largest stocks, is showing a 15% improvement in valuations over 2006. "The economy has been doing very well for an unprecedented length of time, and there is no doubt that that has improved the financial position of the business sector in a way that allows it to create a growing number of jobs", says ANZ Bank's chief economist Saul Eslake. "That is in turn underpinning continued expansion in household spending."

The executive chairman of the corporate information service IBIS Business Information, Phillip Ruthven, says growth is also coming in the finance sector, telecommunications, and business services, while property trusts are also growing quickly as companies move assets off their balance sheets.

Reliance on U.S. Economy Fades

Even the U.S. subprime mortgage crisis appears to have left Australian companies unscathed, as such mortgages comprise only a fraction of the Australian lending market. Those companies with exposure to the U.S. market have seemed mostly untouched. Investment bank Babcock & Brown has announced the crisis would have no significant impact on its operations, while Westfield Holdings, one of the largest operators of shopping malls in the U.S., reported an overall rise in sales of 4% for the three months ended Sept. 30. Some Australian hedge funds have been affected, however, including Basis Capital, which in March had been managing $890 million. Basis filed for bankruptcy for one of its funds in August after an 80% drop in its value. In August, Macquarie Bank, Australia's largest investment bank, warned that two of its investment funds could lose up to $267 million.

However the increasing importance of China means it would take a massive problem in the U.S. economy to have a substantial negative effect in Australia. "Historically, we tend to have an economic cycle which is similar to the U.S. We have now decoupled from that, and we are very driven by developments in China," says Paul Brennan, the co-head of economic and market analysis at Citigroup (C). "One big challenge is to keep one eye on the U.S. and one eye on China."

The Party Continues

Even the impact of Australia's long-running drought, which has been projected to result in a drop in farm production of 18.4% for the 12 months ended June 30, 2007, and take 0.5% off overall economic growth, has not soured the party atmosphere.

The mining windfall has also enabled the government to spread the benefits of prosperity through tax cuts, while still maintaining a surplus of 1% of gross domestic product or higher. Both parties have been promising billions of dollars in new spending in the runup to the election. Such largesse has increased inflationary pressures, with inflation expected to push above 3% next year. This led the Reserve Bank to increase official interest rates by 25 basis points to an 11-year high of 6.75%, just three weeks from the election—the fifth rise since the last federal election three years ago. That recent rise lifted the Australian dollar to a 23-year record high of U.S. 94¢, but the effect on Australian exports has been negligible in most sectors apart from tourism. Australian exports grew by 10.3% in the 12 months ended June 30, 2007, to US$190 billion.

Australians have not voted out a government during times of economic prosperity since 1972. And Howard in the past has pulled off surprising victories at the polls. So it's far from certain the sour mood among Australians will be sufficient to give the Labor Party enough seats to form a government. But regardless of which party wins on Nov. 24, economists see no reason for Australia's economic party to come to an end soon. The longer-term issues may be more problematic, though, and both parties may rue not saving a greater component of the riches being thrown off by the mining boom to deal with such issues as Australia's aging population, positioning Australia to cope with climate change, and improving Australia's educational standards.


Steve Ballmer, Power Forward
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