Why the Australian Economy Is the Next Great Test for Macroeconomic Theory and Policy

HOBART, AUSTRALIA - JANUARY 05: Pouch-led recovery.

Photo by Mark Metcalfe/Getty Images

Australia’s GDP growth numbers beat expectations this week. I do not have a forecasting model for the Australian economy, but I was expecting it to beat forecasts and I expect that whatever the consensus forecast is for the next quarter Australia will beat it to. But how confident am I? Not that confident. What I will be doing is watching it closely, because the Australian econoy over the next year or so should be the crucial test case for some important propositions about the economics of recessions.

You see, even though nobody seems to care about Australia it’s a fascinating economy. What’s fascinating about it is that they don’t have recessions anymore—it’s been over 20 years since an economic contraction. In fact it’s been so long since an economic contraction that Kevin Rudd’s Labor Party was able to defeat the incumbents back in 2007 despite the lack of a recession, and it now looks like Rudd will lose power in the next election despite the lack of a recession. The extreme lack of recessions, in other words, seems to have recalibrated voters’ expectations for economic performance.

Since apart from the recession thing, Australia seems in many ways similar to the United States—a rich, low-density, high-population-growth, English-speaking federal state with a structural trade deficit—you’d think people would be eager to learn recession-fighting lessons from Australia. In particular, the lesson I think they should learn is that if you strategically allow inflation to overshoot as your response to shocks then you don’t have to have recessions.

But whenever I bring this up, people immediately point to China’s rapid economic growth and the related mining boom that Australia’s experienced. My theory, in other words, is that Australia doesn’t have recessions thanks to the good work of the Reserve Bank of Australia. But the conventional wisdom is that we should thank mineral exports. The three big problems with the mineral-centric view, it seems to me, are this. One is that though the 2008 global recession came at a time of high commodity prices, the 2000 global recession did not. The second is that if rapid Chinese economic growth automatically led to economic growth in China’s trade partners, you’d expect to see this impact in Japan as well as Australia. The third is that Australia is not a net exporter and in fact has never been a net exporter so it’s hard for me to understand how you could credit their export sector as the key to full employment. It has to be a story of domestic demand.

At any rate, these days China is slowing down and Australia’s mining boom is over. So will this tip Australia into recession? I have faith in the RBA. Reduced demand for Australian minerals should be a blow to Australia’s terms of trade and Australians should see some consequent diminishment in living standards (traveling abroad will become more expensive, for example). But maybe I’ll be proven wrong and Australia’s recession-fighting prowess will turn out to be just good luck and mining. But if I’m proven right, I hope people will pay attention. The fact that a living breathing developed economy seems to have mastered the trick of avoiding spells of mass unemployment should be a bigger story than it is.