(Bloomberg) – Federal Reserve officials are looking for Australia's record growth in economic growth in the hope that a US recession will not be inevitable.
But have policymakers down under really took over the business cycle? While their economy has entered its 27th year of expansion, it is aided by a surge in commodities, the world's largest immigration program, an increase in household debt and a particularly severe definition of what really is a recession.
Fluke or not, it's tempting the Federal Reserve interest rates that the economy is approaching its record expansion – a mixture that usually indicates a downturn is about offing.
"Australia shows that there is no cosmological constant that says expansions must stop after a certain number of years," said Michael Frolley, chief economist of JPMorgan Chase & Co. in New York. "While the US can not get the same shock absorbers as Australia, with enough finesse and some luck there is no need for the US to have a recession in the coming years."
Ostensibly, the most powerful nation in the world should have an advantage over a small open economy at the mercy of global forces. But the opposite can often become clear: Australia's currency falls at turbulent times and increases the economy's strength by helping export, while the US dollar usually rises when investors flee to it for safety.
This happens this year, when the Australian dollar fell more than 10% from the January high, with the central bank keeping rates low, while the Fed is tightening. After avoiding a decline for a generation, most Australians did not have to tighten their belts since the early 1990s, meaning that the level of household debt is one of the highest in the world.
So when the next global downturn hits, Australia will be more vulnerable.
"What usually happens in good times is debt levels go up and up," said Joachim Pels, global economic adviser at Pacific Pacific Management Co. "Then there will be more deleveraging, which does not necessarily mean that the next recession, if it happens in Australia, will be deeper – but it may be longer."
The Bank of Australia still does not see an end to the economy's dream run, with forecasts revised Friday forecast annual GDP growth of over 3 percent by 2020.
St. Louis Federal Reserve President James Bullard in August noted the Australian attempt to argue that "the idea that you are necessarily going to be in recession just because you have been expanding for a while is not really true." His optimism is echoed by Bill Dudley, former president of the Federal Reserve Bank of New York who earlier this year said the US economy is in a good place and could stay there for 15 or 20 years – like Australia.
"What turned out – even with the global financial crisis – is a less common recession," said James Morley, a professor of economics at the University of Sydney, and a former Fellow of the St. Louis. He estimates that there has been a two-fold decline in the number of years after World War II than in the past 35 years.
Morley cites structural changes as a major factor when economies no longer rely on production and relate to inventory cycles. The increase in control over the service industries in the developed world is bringing about a lower ebb, he says.
For the US, a soft landing would be something unusual.As JPMorgan points out, the downturn usually occurs from the Federal Reserve's forecast of the exclusive economy.With the central bank today interest rates like the financial growth of the Trump government growth , More voices in the US and abroad warn of a recession.
What set Australia apart from the US and other developed economies in the recent global recession was its response: The government deployed a fast and spacious fiscal stimulus to 1.6 percent of GDP – which included direct mailings to households – compared to US spending of 1.25 percent, Australian Ministry of Finance.
China's rapid industrialization and its hunger for commodities has boosted growth in Australia since the early 2000s, as did immigration. Australia admits more immigrants than any large Western country and annual consumption has almost doubled since the turn of the century.
With population growth adding at least 1.5 percentage points to GDP growth each year and another 1 percentage point coming from commodity shipments, an expansion of 2.5 percent is quite a baked into the economy.
The definition of recession is also a factor in perpetuating Australia's growth on paper. The US National Bureau of Economic Research defines it as a significant decline in economic activity lasting several months to more than a year.The technical definition in Australia is two consecutive quarters of contraction.
In Australia "were actually two declines, when the rest of the world were two recession, they just are not called a recession," said Flemish's Pless. "I do not think the Fed will be particularly pleased with a situation in which the unemployment rate will rise significantly, I think in the US we would call it a recession."
To contact the reporter about this story: Michael Heath in Sydney at [email protected]
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