Impact of the Global Financial Crisis on Australia

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Just like with any other country, the Australian government’ main aim has been to promote economic growth and development. This is what every country works towards to reduce unemployment, poverty inflation, interest rates among other important factors. However, the global financial crisis caused negative impacts on almost every country. The global economy was dramatically affected leaving countries to struggle towards their original positions. Some took long to recover while others are still yet to recover from the major losses. Among all countries, Australia has been considered as the least affected countries by the global financial crisis (Milesi-Ferretti and Tille, 2011, p. 20). Though the crisis caused some impacts on the country, it is claimed to have happened like it was in other countries. This paper aims at identifying and explaining the impacts of the global financial crisis on Australia and how the government use macroeconomic policies to stabilize the economy.

Overview of the 2008 global financial crisis (GFC)

There are various factors that contributed to global financial crisis. These factors include: raise in the number of borrowing cases for investors and banks, excess instances of risk-taking in a surrounding favorable for macroeconomic and lastly policy error and regulation. The global economy was greatly affected by the crisis. House prices dropped, unemployment rates increased, several currencies depreciated in value among many other effects. The reduction in house prices made the housing industry less profitable. Those who had taken loans for house construction began to experience difficulties in paying back their loans. Other investors were also discouraged from venturing into the property and housing industry because of the reduced profitability. Loan repayment became difficult leading to a high default rate among the borrowers (Mishkin, 2011, p. 51). Banks on the other hand started facing difficulties in performing their business operations. The high default rates would hinder them from meeting their set objectives and goals and hence causing the financial sector to experience failures and struggles. A number of banks collapsed in various countries. The collapse of the major banks made it difficult for investors to access loans.

Australia is among the countries that were affected by the global financial crisis. However, as compared to other countries like the United States and China, The impact of the global financial crisis was not that much in Australia. The Australian government was able to manage the situation well and thus causing the country to maintain its position in economic performance regardless of the many encountered problems and challenges. Australia never experienced a large economic downturn during the GFC but its economic growth rate slowed down. Unemployment rates increased sharply (Milesi-Ferretti and Tille, 2011, p. 291). The country’s economic performance during the period, contrary to what was happening in other countries reflected a number of factors. First, banks in Australia had a little exposure to the American housing markets and banks mainly because of the highly profitable domestic lending. Secondly, the subprime and risk loans were only but a small part of the Australian lending share mainly due to the historical focus in the Australian lending standards.

Impacts of the global financial crisis in Australia

The March 2009 0.4% growth in GDP was a clear indication that Australia had escaped from the global recession. The banking sector had less been affected as compared to what was happening in other countries. Australia's economy was still at its peak, doing great unlike what was happening in other countries. This difference granted a great hope for the country’s success, not knowing that the effects would lager manifest negative results. As the year 2009 was coming to an end, several collapses took place among the highly leveraged investment companies in the country. This is the time when Brown and Babcock, advisory and global investments firms failed. Other two large companies, Great Southern and Timbercorp also failed within the period April and May 2009 (Fratzscher, 2012, p. 342).

The mortgage trust industry is another area that was greatly affected by the global financial crisis. Following the crisis, a large number of the trusts responded with redemption freezes whole others offering withdrawals and on a prorate basis. The pension fund sector was also badly hit by the crisis. People could hardly contribute towards their retirement. Many withdrew from retirement programs as they worked towards bringing their businesses back to life. Those who had completely lost their jobs and investments were not in a position to pay for their retirement and hence affecting the sector. In simple terms, pension schemes no longer became a priority for many people after the recession (Claessens, Dell’Ariccia, Igan and Laeven, 2010, p. 293).

The securities’ market also froze. Non-government debt increased causing an increase in risk aversions levels in the Australian market. At first, Australian’ currency depreciated in value to against the US dollar as speculators became risk averse towards the Australian currency. As this was happening, the reserve bank of Australia kept on reducing the short term interest rate to about 7.2% in the mid-2008 and up to 3% in 2009. The reduction in interest rate caused the domestic currency to again appreciate against US dollar to around 0.8 in 2009. Another impact caused by the recession was loss of employment. As major companies in the banking, securities exchange and other industries collapsed, many people were left jobless without knowing what to do next. Australia came to have a larger population of skilled and experienced workers who had become jobless (Chor and Manova, 2012, p. 118). People would hardly fond jobs unlike it had been in the previous years. The remaining companies also struggled to cut their operational costs, finding that reducing the number of workers would help them achieve their objectives. However, as time continued, the large number of unemployed skilled and experienced labor force did not lose their value. People started turning their skills and experience into business and investment ideas. With the reducing interest rate, people would access bank loans, use as a source of capital. This is among the reasons Australia was not much affected by the GFC. Instead of facing increasing levels of unemployment, people created more jobs through investments and entrepreneurship practices and hence restoring the economy back to outs pick.

The manufacturing sector was also greatly impacted by the GFC. The manufacturing sector has been declining within the economy with share in the total GDP reducing as time continues. Presently, the manufacturing sector only contributes 8.5% of the total revenue as compared to the 12.1% in 2000. However, further analysis reveals that the impact on manufacturing sector was not much several as it was with other countries like China and the United States (Allen and Carletti, 2010, p. 1). Much impact was however experienced in the automotive industry where the industry faced a decline in exports while at the same time a fall in the domestic demand because of the households and business limited spending.

In trade, Australian's merchandized trade reduced by about 11.6% in 2009 where the country experienced a fall for the first time since 1964. The value of total exports reduced by 27.4 billion from their peak record in 2008. At the same time, the value of imports reduced by 22.5 billion. These reductions resulted to a cut in the merchandize trade lead to a 0.04 percent cut in the country’ s level of GDP. As a result, trade between Australia and its partners dramatically reduces affecting the country's level of economic growth.

The housing market also declined as a result of the global financial crisis. People in Australia could no longer exchange their homes for profits while mortgages were no longer easily affordable for most of the home owners. At the same time, many mortgage loans were defaulted making financial institutions and investors with the burden. As a result, investment firms and banks started bleeding money. There were also decreases in housing prices which slowed down the growth of new buildings leaving many constructors and laborers jobless. Because of the massive losses, many banks closed down while the remaining ones tightened their lending requirements (Rudd, 2009, p. 20). Though the government had reduced the interest rates, it was not easy to acquire bank loans. Most of them demanded huge securities and other hard to get qualifications and thus difficulties in loan access.

Another impact was the reduction in foreign direct investments. Before the crisis, Australia had become of the leading countries in terms of foreign direct investments. The favorable business environment had attracted many investors from various parts of the world. FDIs had become part of the main source of revenue in the country. The government would collect large amounts of money in the form of taxes from these foreign investors. However, as the environment became less favorable, foreign investors started going back to their countries one by one (Mishkin, 2011, p. 69). There were minimal reasons for them to stay in Australia and most of them seemed for better opportunities in other places. As a result, foreign direct investments reduced in the country causing a reduction in government revenue.

How the government used macroeconomic policies to stabilize the economy

In response to the global financial crisis the Australian government applied both monetary and fiscal policy to deal with the situation. Non-of the policies would effectively work alone and hence the government applied each of them at the same time. There was a contraction monetary policy and an expansionary fiscal policy at the same time. The contractionary monetary policy was interned to make bank loans more accessible and affordable to attract more investments and thus creation of more employment opportunities. The expansionary fiscal policy on the other hand was intended to cause more infrastructure and other government expenditure activities and thus creating more employment (Milesi-Ferretti and Tille, 2011, p. 291). As a result, each of the two policies improved the situation, causing Australia to become one of the leading economies after the recession.

Monetary policy-Reserve Bank of Australia

One of the significant macroeconomic policies following the global financial crisis came from RBA (the Reserve Bank of Australia). In October seventh, the RBA board came to an agreement of cutting the bank interest rates by 100 basis points. The RBA board’s agreement contained a recommendation of a large reduction in terms of the cash rate. As this was happening, the Strategic Policy Budget Committee was comprised of the treasure, finance minister, prime minister and the deputy prime minister who used to hold meetings regularly for purposes of discussing economic development matters and develop appropriate and useful policies. On eighth of October the same year, the treasure went to the United States, attending the World Bank and IMF annual meetings. It was considered important for the treasurer to get firsthand knowledge and experience of the financial crisis from the United States. It was a strategy to help the Australian committee members gain knowledge, experience and knowhow to deal with the situation using the best strategies and means possible (Fratzscher, 2012, p. 342). Coming October 12, the Australian government made an announcement to guarantee fund all its banks. It was the first time for such a step to be made in Australia throughout the country’s history.

During the mid October 2008, the four largest banks in Australia emerged as part of the 10 rated AA banks in the world. This was an indication that the government had employed the most appropriate measures and much effort to ensure stability in their financial sector. However, irrespective of them being put in a better shape and position, Australian banks were still put at a high competitive disadvantage as compared to their international competitors. The measures of financial stability required the government to take risk on business and consumer concerns in the financial sector.

Fiscal policy

Exactly two days after announcing the financial stability measures, the Australian government made an announcement of $10.4 billion package as the country’s value of Gross Domestic Product that year. This was after a discussing among the government and its advisors concerning the possible fiscal policy responses following the crisis. From the discussions, the fiscal policy was directed towards the country’s weak sectors which were the housing and the consumption sectors. The consumption and housing industries represented more than 60% of the Australian economy and thus, considered important to support them. As a result of the policy, first home buyers were offered with a time limited grant which took place immediately. The issue of grants to first home buyers was used as a tool of stimulating the economy from the great recession. There was much confidence that the policy would yield positive results because a similar policy had been successful during the early 2000s when the economy had slowed down. On the consumption aspect of the policy, significant cash bonuses were paid to carers, pensioners, seniors, and low income households during the earlier weeks after the announcement was made (Claessens, Dell’Ariccia, Igan and Laeven, 2010, p. 291). This policy was made on the basis that consumers tend to spend more when their income levels increase. As such the cash bonuses would increase spending levels among the consumers and thus, contributing to rise of the gross domestic product.

In October, the government started making plans of bringing forward the start of large scale infrastructure projects. The first phase of the projects was worthy $4.7 billion and it was launched in December. It is also important to note that other important developments had taken place during the late 2008 in Australia. In the months of November and December, there were dramatic decreases in interest rates and it is when the global response towards the crisis intensified. Because of the increasing likelihood of recession, the Australian government came up with plans, getting ready to respond with the most appropriate and effective policies to support the available workforce and thus minimize the unemployment effect. Through the infrastructure projects, the government was able to create more employment opportunities for all groups of people (Chor and Manova, 2012, p. 117). Another aspect of fiscal policy was on the depreciating Australian currency. The government came up with measures of improving the domestic currency among which were to discourage imports while encouraging more exports from Australia to various countries including the United States and China.

Australia attempted to use the infrastructure spending strategy to support the economy in the previous years. However, the strategy has in most of the cases not been successful. Further analysis reveals that in all the times in which the government employed fiscal policy measures, there were no successful results. Fiscal policy measures have been a challenge in solving the country’s economic problems. Looking at the monetary policies, the RBA had also not been successful in bringing a substantial solution towards the economic problems. Further, it was concluded that both the proposed fiscal and monetary policy measures be implemented together for useful results (Allen and Carletti, 2010, p. 1). The RBA strategies were employed the same time with the fiscal policy measures. In doing so, Australia emerged as the less affected country by the Global Financial Crisis.

Conclusion

According to the above discussions, the global financial crisis has several negative effects in the Australian economy. The country experienced rising unemployment rates, depreciation of the domestic currency, a fall in the house prices among many other factors. Several industries were affected starting with the financial industry, mortgage and automotive industries, trade, among others. Australia experienced difficulties, affecting the economic growth and development just like it happened with other countries. However, further analysis of the issue reveals that the GFC had no much impact on the Australian economy than it was with other countries. Though the recession caused some negative effects, it did not last for a long time. Australia took a shorter time to recover from the crisis as compared to other countries. The major reason towards the country’s success even after the global financial crisis were the government policies as applied after the recession. The government employed a contractionary monetary policy with an expansionary fiscal policy. These two major policies enabled Australia to get back to its original position shortly after the crisis. Instead of encountering much suffering, there were some improvements in the level of growth and development. As other countries were still struggling, Australia became a center for business, FDIs, and other important economic activities. Therefore, it can be concluded that, Australia did not suffer too much from the Global Financial Crisis as it was with other countries. At the same time, it is evident that the combination of fiscal and monetary policies produces effective results as it happened with Australia.

Bibliography

Allen, F. and Carletti, E., 2010. The Global Financial Crisis. Documentos de Trabajo (Banco

Central de Chile), (575), p.1.

Chor, D. and Manova, K., 2012. Off the cliff and back? Credit conditions and international trade

during the global financial crisis. Journal of international economics, 87(1), pp.117-133.

Claessens, S., Dell’Ariccia, G., Igan, D. and Laeven, L., 2010. Cross-country experiences and

policy implications from the global financial crisis. Economic Policy, 25(62), pp.267-293.

Fratzscher, M., 2012. Capital flows, push versus pull factors and the global financial crisis.

Journal of International Economics, 88(2), pp.341-356.

Milesi-Ferretti, G.M. and Tille, C., 2011. The great retrenchment: international capital flows

during the global financial crisis. Economic Policy, 26(66), pp.289-346.

Mishkin, F.S., 2011. Over the cliff: From the subprime to the global financial crisis. Journal of

Economic Perspectives, 25(1), pp.49-70.

Rudd, K., 2009. The global financial crisis. Monthly, The, (Feb 2009), p.20.

August 18, 2023
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