Booming Australian Economy

Submitted by Marco Palmero on 19 October, 2007 - 10:37

Booming Australian Economy

The Australian sharemarket as well as international stockmarkets have been in bull mode for a while. The twentieth anniversary of the 1987 stockmarket crash is today: October 19th. The Australian economy has seen four years of continuous growth. So what's going to happen to our booming Australian economy? What are all these signals telling us?

Economic History 101

Did you know, today, Friday October 19th 2007 is the 20th anniversary of the history making, record breaking October 1987 market crash. Back in the 1980s global stocks and the Australian economy were booming after the early 80s recession, economic reform ad deregulation and re-rating of shares as a result of lower inflation. Australian shares nearly doubled in a year to the September 1987 high which was strongly supported by entrepreneurial stock gains. The American stockmarket peaked a month earlier in August. On October 19th the US stockmarket fell 20 percent and the Australian market followed the trend dropping 25 percent on the next day's trade (October 20). From pre-crash highs to their lows, the American stockmarket fell 35 percent and the Australian sharemarket fell by 50 percent. It took the USA stockmarket two years to recover and surpass previous highs while the Australian sharemarket took a little longer to recover: it only surpassed highs made in 1987 in February 1994.

Subprime Mortgage Financial Crisis

The Australian economy is very much a part of a global community. If the American market sneezes, the Australian economy and the global markets can get a really bad cold. The subprime mortgage financial crisis affected the markets late July 2007. What are Subprime mortgages? They are the loans that are extended to people with low incomes who can't really afford the loan. Rising interest rates increased the monthly payments on the newly-popular adjustable rate mortgages and property values suffered declines from the demise of the US housing bubble, leaving home owners unable to meet financial commitments and lenders without a means to recoup their losses. As a result, there was a sharp rise in foreclosures (people defaulting on their loan).

So how does the subprime mortgage financial crisis affect global markets? Well you’ve got the large number of loans defaulting. Which are leading to the localised bankruptcies of major subprime lenders. Then you've got rising US interest rates. There is a current slump in housing starts in the US (the number of new homes being built). But the biggest problem is the US consumer confidence which could scare off Americans from spending. In simple terms, Americans buy a hell of a lot of stuff from China and India, among other countries. And Australia - the resource rich country, which is currently witnessing a resources boom is supplying demand from China and India.

And that's why Ben Bernanke, the US Federal Reserve Chief slashed US interest rates by 50 basis points (0.5 percent). A normal move would be to move the interest rates by an increment of 0.25 percent. There is talk in economic circles that US interest rates could be reduced three more times in the coming months. This strong decisive action would bring down the amount that the people have to pay on their subprime mortgage repayments. Worldwide markets were jump started from the decision, the Australian sharemarket jumped for joy and the Aussie dollar reached for record breaking 18 year highs.

Australian Economic Indicators

We've had a booming Australian economy. 16 years of consecutive growth. 4 years of a strong booming sharemarket. Let's look at employment rates: an important economic indicator. Our economy is going so strong that there isn’t enough skilled workers to fulfill demand. Unemployment rates are at a 32 year low. Australian Federal Treasurer, Peter Costello has said that, "Australia had rewritten the rules about what constituted full employment, he said. "The OECD [Organisation for Economic Co-operation and Development] was saying 7 per cent [unemployment] would be full employment in Australia. We got it lower [to 4.3 per cent]. I think we can get it lower than it is now."

Another Australian economic indicator to look at is building approvals. Building approvals fell more than expected in August, but the poor performance in the housing sector could force inflation higher, with rents and house prices tipped to rise amid a lack of supply. Building approvals fell 1.7 per cent to 12,751 units in August, seasonally adjusted, from a downwardly revised 12,974 units in July, the Australian Bureau of Statistics said. There is also wage pressures, as wages rise across the board and petrol prices keep rising.

Where does the Australian Economy Go From Here?

There may be a looming Australian interest rate rise on the boards. UBS senior economist Adam Carr expects interest rates to rise in February net year. "The retail sales data, the imports data, business and consumer confidence, all point that way," he said. "The pressure is for the Reserve Bank to tighten." Citigroup's director of economic and market analysis, Stephen Halmarick, is tipping the 7 percent interest rate level by early next year.He notes the key "pressure points" as rents, home building costs, food, electricity and petrol prices. Acting senior economist for Australia at ANZ, Riki Polygenis, said she was forecasting one rate rise in February next year. Underlying inflation is close to the Australian Reserve Bank's 3 per cent mandated maximum. Annette Martins, an economist at Macquarie Research, said that the Reserve's decision would also depend on an improvement in the credit market. The 90-day bank bill rate, currently sitting at 6.9 per cent, would have to fall to somewhere nearer the official cash rate of 6.5 per cent.

Last week it was announced that the jobless rate has fallen to a 33 year low of 4.2 percent which would certainly put pressure on a possible interest rate rise in November. The number of jobs increased by 13,000 in September: where s fall in full time employment of 17,200 was offset by a surge in part time jobs of 30,100. Economists had largely expected total employment to rise by 20,000 jobs and an unemployment rate of 4.3 percent.The proportion of people in or looking for work remained at a near-record level of 65 percent. "For the first time in a generation we can say with confidence that anyone who wants a job can find one," the chief equities economist at CommSec, Craig James, said.