Peering through the gloom: Five reasons Australia’s economy remains well placed

It’s easy to get despondent now. The Australian sharemarket is slumping, house prices are down, Europe remains in crisis and the US is stuck in a funk that will take years to shake.

Confidence is undoubtedly down and there seems little doubt that households and businesses will remain cautious until the global situation improves.

But entrepreneurs should not be dropping their heads or hiding under the doona. Australia’s economy still has sound fundamentals and is well placed to absorb short-term shocks that might be headed our way from overseas.

We’re not arguing that things are going to get bumpy, but here are five reasons we’re in a good spot.

1. There’s plenty of room to cut rates

Interest rates in the United States, Britain and Europe have been locked so close to zero for so long that it’s hard to imagine a time when they will rise. But, in Australia, it’s a very different story. The official cash rate is at 3.75% and so has plenty of room to fall if the RBA needs to stimulate the economy. Rates dipped as low as 3% at the height of the GFC in response to global shock – we can go that low, or lower, if required.

2. China is still China

Just as it was during the GFC, Australia’s big buffer remains the Chinese economy. True, economic growth has slowed from the 10% we saw a few years ago to a more sustainable 7-8%, but that’s still enough to keep demand for Australian goods – particularly minerals – relatively high and economic growth ticking over. Even if commodity prices drop a little, Australia’s big exporters will continue to do well. Take the iron ore price, which is tipped to drop from around $US130 a tonne to $US110 over the next few years. Australian miners’ costs are around $US50 a tonne – even at that lower level they’ll be doing very nicely.

3. Balance sheets are in good shape

From the top end of town to private companies through to SMEs and households, Australian balance sheets are in good shape. While retailers would love Australians to be spending more, we can’t really knock people for taking a conservative view and paying down debt, including mortgages and business loans. Less debt means companies and households should have much more flexibility to absorb any shocks – and, when the turnaround comes, they’ll be in relatively good shape to invest.

4. Unemployment remains low

Take a moment and think about Spain, where the unemployment rate is 25% and youth unemployment is running at around 50%. Now think about Australia, where the unemployment rate is expected to rise this week…to a paltry 5.1%. While job security fears appear to be playing on consumer confidence, the fact is our labour market remains strong and skills shortages remain an issue in many industries. The job losses in sectors undergoing structural change are worrying, but we do need to focus on the bigger picture here – unemployment is at or close to historical lows.

5. The Government has room to move

Regardless of how rubbery Wayne Swan’s surplus really is, there is no doubt that the Federal Government’s fiscal position means it has plenty of room to step in and provide support to the economy if required. For SMEs, there are some good initiatives starting from July 1, including instant asset writeoffs for assets under $6,500 and motor vehicles. The government could, if required, launch another $1,000 instant asset writeoff program as it did during the GFC, or even do some more of its famous cash handouts. Swanny has the firepower and the room to move, unlike so many of his fellow treasurers around the world.