HSBC Australia chief economist Paul Bloxham’s latest research paper titled The Longest Boom considers what is required for the Australian economy to continue thriving.
“Australia will almost certainly have a recession at some point,” Mr Bloxham said. “However, what is clear is that over the past 26 years, the volatility of Australia’s economy has been much lower than at any other time in the country’s history and most other countries experiences.”
The economist noted that Australia has managed to dodge a number of global shocks, including avoiding a recession during the Asian financial crisis in 1997/1998, the IT bubble of 2000, and the Global Financial Crisis of 2008/2009.
Australia also avoided having a recession at the end of a housing credit and price boom in 2002/2003, during a drought of the early 2000s and at the end of the recent mining investment and commodity price boom, which peaked in 2011/2012.
Part of it has been luck, Mr Bloxham said, but believes that good economic management has also played a central role in the nation’s economic prosperity.
“An independent central bank with a clear mandate to flexibly target inflation has proved to be an appropriate institutional arrangement for a medium-sized commodity producer,” the chief economist said.
“The RBA has adeptly managed the cycle maintaining on target inflation and financial stability and deserves significant credit for the long boom.”
When the long run finally ends, as HSBC believes it will, the trigger will most likely be a negative shock from overseas rather than any internal driver. However, our love affair with debt will not help us when the downturn arrives.
“A sharp downturn in Asia, when one arrives, would prove harder for Australia to deal with than the Global Financial Crisis, which was centred on the developed world. Australia’s high levels of household debt would be likely to exacerbate any downturn,” Mr Bloxham said.
“Australia needs reform to support productivity growth and prepare for the next downturn. The priority should be fiscal reform, which leads to sustained budget surpluses. Measures should include shifting the tax mix towards more efficient taxes, such as consumption tax, and cutting back on public spending commitments that do not deliver strong economic returns.”