RALF HIRSCHBERGER
It is tempting to be envious of Australians.
They do very well at the Olympics. They boast wonderful cities and gorgeous beaches, and outrank Canada in the United Nations Human Development Index. (They're second, we're fourth.) To be sure, they have to put up with poisonous spiders and Vegemite, and their forest fires are really more of a season than an event. Still, they are nicknamed the Lucky Country for a reason.
Now, the nation that gave birth to the sunny stylings of both The Bee Gees and Olivia Newton-John has given the world something even more optimistic: hope that the global economic recovery is truly gaining some traction.
On Oct. 5, the Reserve Bank of Australia, the county's central bank, raised eyebrows by being the first major economy to raise interest rates. In other words, the Australians tapped on the economic brakes while the rest of the industrialized world is scrambling to stomp harder on the accelerator.
The RBA's press release was peppered with cheery notes such as "Economic conditions in Australia have been stronger than expected and measures of confidence have recovered," and "Housing credit growth has been solid and dwelling prices have risen appreciably over the past six months."
What is going on down there? Didn't they get the memo about the world crisis?
In fact, Australia is one of a very few OECD countries that did not slip into recession in this latest global downturn. Recently, the country has posted its biggest job gains in two years, with an increase of 41,000 jobs in September alone. The unemployment rate has fallen to 5.7 per cent. Investment in the country has stayed strong, and the Australian dollar is a star performer on the international currency stage.
The RBA's move stirred chatter about the likelihood of other countries - such as Canada - being next to hit the brakes and raise rates. The prospect that Canada might follow suit excited currency speculators and helped lift the Canadian dollar within minutes of the Australian rate hike.
Those speculators might be forgiven for their enthusiasm in Canada's economy. After all, the two countries have a lot in common.
They are both medium-sized economies with thin populations spread across an enormous, unforgiving geography. They are both former British colonies, and Queen Elizabeth is both countries' head of state (although Australia has flirted openly with going it alone as a republic, and Canada's Governor-General evidently has a particular interpretation of her role).
WHERE THE SIMILARITIES END
Also, both countries were in good fiscal shape going into the global downturn. Because they ran large surpluses for several consecutive years, the federal governments in both Ottawa and Canberra introduced stimulus programs and tipped into deficit without impairing their credit ratings. Both countries have strong banking sectors, in which stricter regulations and more conservative lending prevented much of the collateral damage that hit Europe at the time of the U.S. banking meltdown last year.
Most importantly, both countries are significant natural-resource exporters, particularly base metal mining and energy products. That makes the currencies of both countries extremely sensitive to movements in commodity prices. Both the Canadian and Australian dollars have been soaring lately, in no small part because of rising resource prices.
Here is where the similarities end. Although Canada and Australia have much in common, the likelihood that Australia's monetary action is a harbinger of rate increases in Canada is almost zero. There are some striking differences that put our southern sister in a completely different economic orbit.
Both countries engaged in stimulus programs, but Canada has focused on shovel-ready infrastructure projects, while a big part of Australia's stimulus spending was on "soft infrastructure" - education, innovation, science, technology. According to Justin Brown, Australia's High Commissioner to Canada, these investments have done much to lift Australia's economy, particularly in increasing productivity and innovation in the services sector. Jobs in finance, for example, have blossomed.
Australia's investments in these soft infrastructures provide an interesting case study into how education and innovation can lift an economy. For years, economists have noted the high correlation between education levels and economic success: The two go hand-in-hand, and rarely goes one without the other. Canadian politicians understand this as well, yet when the recession clenched its jaw around federal and provincial government budgets, spending on education was suddenly in jeopardy. Unfortunately, some still view education as a "nice-to-have" rather than the essential requirement for economic growth.
It appears Australia may have got it right.
Also unlike Canada, Australia has a relatively small manufacturing sector. This has saved it much of the pain being felt in Southern Ontario, where mass manufacturers (conspicuously, in the auto sector) have been squeezed under the weight of a global recession, a strong currency and competition with low-cost countries.
But the primary reason why Australia is different is that its economy is linked much more closely to China than it is to the United States. What the U.S. is to Canada, China is to Australia. And after slowing only modestly in early 2009, China's economy is picking up from where it left off in 2008, heading back to double-digit growth rates. China has been importing enormous amounts of coal and iron ore - both big export products from Australia.
Targeted stimulus spending in education, an economy less reliant on manufacturing, and a good customer in China - with assets like that, it is little wonder Australia has emerged from the global economic battering with little more than a scraped knee. The International Monetary Fund, in its October 2009 World Economic Outlook, predicts that Australia's real GDP will expand by 0.7 per cent this year. Canada's, on the other hand, will contract by 2.5 per cent.
In its outlook, the IMF says that "the recent evolution of industrial production, retail sales and confidence indicators suggests that Australia is on its way to recovery," but in the same paragraph, notes that Canada is only now approaching "stability."
It's not correct to say the Lucky Country down under is without problems of its own. A heavy reliance on its largest trading partner could eventually be troublesome. While the Chinese have been on their best behaviour lately, China is still run by a dictatorial government with a less than acceptable record on human rights. At some point in the future, it is conceivable that another Tiananmen Square atrocity could turn global sentiment against China, which would put Australian exporters in a tight spot.
Australia is also beset with water shortages. Parts of the island continent are literally baking. Both Canada and Australia face some frightening unknowns from climate change, but Australia's intense heat and aridity pose environmental threats worse than those faced here in Canada.
But these problems - real or potential - are not enough to hold Australia's economy back. Nor are they enough to keep Australian interest rates as low as Canada's.
The Bank of Canada continues to stick with its "conditional commitment" to keep the overnight interest rate at the record low of 0.25 per cent until next June. Yes, the commitment is conditional, which gives the bank some wiggle room if in fact the situation changes - a little like saying, "I promise to marry you unless I meet someone better." Without question, interest rate hikes are coming to this country, but not soon. Signs of inflation on the horizon would certainly prompt rate increase. But at the moment, there's scant evidence of inflationary pressures building.
Some resources prices have recovered, especially those for crude oil. But prices for other resources, such as natural gas and most forestry products, are still in the doldrums. And even oil hovering somewhere between $70 and $80 (U.S.) a barrel is not enough to vault the entire Canadian economy into robust growth.
THE KANGAROO AND THE BEAVER
Unemployment and overcapacity in the economy are other issues. More than 1.5 million Canadians were out of work in September, and many more were working only part-time or in jobs for which they were clearly overqualified. Overall industrial capacity in the second quarter of this year slipped to 67.4 per cent, its lowest level since the start of the data series in 1987. And even in mining and oil-and-gas extraction - the very sectors that are lifting Australia at the moment - capacity utilization in Canada is a meagre 68.2 per cent. Can the Bank of Canada really justify rate increases right now?
Perhaps the biggest reason why the Bank of Canada is in no hurry to tighten rates (and, if anything, may reach for other monetary tools to ease conditions) is the sky-high Canadian dollar. This remains the top problem holding back Canada's enfeebled economy as we crawl out of recession. Raising Canadian interest rates would surely send the loonie well above parity, delivering yet another cruel blow to exporters.
Canada may indeed have much in common with its Commonwealth sister, yet the economic differences in the final stretches of 2009 are still vast. Along with the sun, sand and surf, we can add "thriving economy" to our list of reasons for coveting Australia. The kangaroo may be hopping full speed ahead, but the beaver is just gradually emerging from a very long hibernation.
Todd Hirsch is a Calgary-based senior economist at ATB Financial.
Todd Hirsch