Crack the Crunch with the Crunch Breaker

Guess which country escaped the recession?

July 31, 2009

I wrote about this a few months ago and it seems my hunch was right – our antipodean friends down under are winning through when the rest of the world is limping along.

According to the UK financial paper CITY AM, Australia has managed to avoid the recession.

There has been alot written about the recession being a global phenomenon, affecting every developed country. Yet Australia is a glaring exception; it has not only avoided the worst of the destruction, but has not even gone into recession, which is truly astonishing.

Although Australian GDP contracted by 0.6% in the 4th quarter of 2008, it expanded by 0.4% in the first quarter of 2009, which seems to have gone unnoticed in Britain and elsewhere. But why has this happened?

The Reserve Bank of America started to hike interest rates in 2002, many years before the rest of the world realised that an irrational exuberance had set it. The bank had taken early action to cool the property market which in 2002 in Australia was spiralling out of control and the impending bubble threatening the economy. Sounds familiar?

Plus the Australian banks steered clear of sub prime loans – accounting for just 1% of the total in 2007 versus 13% in the US, so their banking infrastructure remained intact – there have been no bail-outs of banks and state-financed recapitalisations.

Their action led to a slowdown in home loan lending – from a peak of 21.5% in 2002 to only 7% in May 2007. As a result the housing market cooled down and Australians started to save money.

Even today the base rate in Australia is at 3.5%, much higher than the rest of the world – but the economy is ticking along despite this and they still have plenty of ammunition to reduce rates further if needed.

This may well be case-study material for the post recession analysts, one thing’s for sure. I will be happier than ever to jump on plane to Oz to visit some of my customers.

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