1.0 Introduction
The report discusses the economic crisis in Australia and the steps that were taken to rejuvenate the economy. The financial crisis of 2008/09 affected many countries, and although Australia ducked it to some extent, the economy was nevertheless affected, as indicated by unemployment rates and financial markets. The focus is on monetary macroeconomic policies that were implemented by the Reserve Bank of Australia. The effects and recommendations are discussed.
2.0 Background information
Australia is one of the few countries amongst advanced economies that were not affected much by the crisis on the scale of others like the UK and the USA. Nevertheless, the effects of the financial crisis led to a raft of monetary policies to boost the economy from poor performance. Interest rates were the main tool that was used, where a reduction of 100 points was implemented. Cash rate was reduced from 7.25% to 6%. Other measures included boosting the financial market by injecting $25 billion and cushioning the housing market by assisting new buyers from low and middle-income countries. These measures were supposed to make the economy vibrant and liquid enough. Other laws that focused on the protection of consumers were also passed in the country.
3.0 Effect of the 2008-2011 global recession
The global 2008-2011 financial crisis had far-reaching effects outside the United States, the epicenter where it was sparked by a bust of the housing market bubble. Integrated financial markets, especially in developed economies, and poor insulation from external shocks meant the economies outside the country were likely to be affected by the country. The country was largely unaffected by the crisis, although there were shocks that affected the country slightly. As indicated in the figure below, the economy of the country took a slight dip in 2009 but recovered later in the subsequent years.
Source: The World Bank
Glennen (2017) noted that not many countries have had their GDPs grow without recession, like Australia’s 100 straight quarters. It was noted that the country took measures that allowed it to avoid the financial crisis in 2007 that affected many economies in the world. Alexander explained that the main reason the country weathered the storm was due to its low government debt at the time of the crisis compared to other economies that were affected, especially in Europe. The country had strong foundations of a surplus budget and was debt-free. However, their effects are not severe despite not being severe.
Key effects that were noted included a fall in personal wealth due to the shrinking prices of shares. Consumers withheld spending but increased their savings. This meant that the economy stagnated slightly. According to Zappone (2008), share prices fell as indicated in some benchmarks such as ASX200, where it recorded losses and a fall in value by 8.3%. This was said to be the worst since the 1987 crisis, with the total value of S&P/ASX200 falling below $1 trillion. The fall was prompted by panic-stricken investors who were wary of the financial market in the country and associated advanced economies. General household wealth fell by 16% and unemployment rose to 5% in the period up to the June quarter of 2008 (Budget, 2009).
Besides, the Australian dollar also fell to its lowest rate since 1983. The figures below indicate a fall in GDP in 2008/09 due to the financial crisis shocks. Growth rates fell below 0%. Alongside the real GDP graph is that of unemployment rates between 2002 and 2011. The same effect was felt as the number of people in labour fell in 2008. This could be due to increased savings and a slowdown in investment, a reduction of economic activity that led to the shedding of some workers.
Source: Eslake (2009)
Kennedy (2009) reported that in February 2008, the level of unemployment had hit a low of 3.9%, which was the lowest in 33 years. This had wide implications in the economy, including a decrease in production and a due to shrinking demand, customers holding back their consumption. Low demand also meant that prices of goods fell as factories were struggling to clear stock. Furthermore, businesses that needed capital to finance their operations had challenges accessing it due to the generally reduced availability of credit. Business growth slowed, and those that had liquid cash closed down, partially or completely. This led to reduced demand for workers, and some were cut from organisations as they struggled financially. Another effect that was noted was the lagging effect on the economy following an increase in interest rates. Adjustment of interest rates upwards is meant to reduce inflation due to a lack of money to spend on investments such as the purchase of machinery and equipment. Financial crisis worsened the situation, forcing the country to adopt a raft of other measures, which are explained below.
4.0 Monetary policy by the government
Cutting interest rates by 100 points
This was one of the most notable measures that was implemented by the government in the face of the credit crunch that threatened to cripple the economy. The goal was to make it easier for businesses to access finance. The cut made by the Reserve Bank was said to be the least since 1992, when the country was rising from another major financial crisis. Zappone (2008) observed that a reduction in points also forced banks to cut their interest rates by 80 points. The drastic measure was to turn around the economy that was headed for worse as the crisis worsened. Other organisations, such as Aussie Home, followed suit and cut their lending rates by as much as 75%. The central bank further reduced the cash rate from 7% to 6%. Low interest rates were meant to stimulate the economy, which was affected by the crisis that especially affected developed economies.
Increase in the issue of Commonwealth Government Security. This was necessitated by the slow economy and therefore needed additional funds to “maintain the liquidity and efficiency of the Treasury Bond market” (Swan, 2013). It was also meant to make the financial market more robust and efficient, as the bond market is active and efficient. Besides, the provision of these bonds was followed by strong demand from the people who sought safer investments. Australian Office of Financial Management (2009) added that by the end of 2009, the government had increased the value of these bonds to around $79 billion, an increase from $39 billion in 2008. The securities were spread over several years during the maturity period, and this was done for the same goal of increasing liquidity in the economy. Besides, treasury notes were issued for within-year financing. The government aimed to maintain at least $10 billion of Treasury Notes to keep the market liquid. One of the reasons for this was to reduce the additional costs of the government in the acquisition of credit.
Establishment of a Financial Claims Scheme
This was established to buffer consumers’ deposits in financial institutions should they fail in the event of a financial crisis (FCS, 2008). Banks, building societies, and credit unions were targeted by this organisation. The Scheme prevented potential loss, allowed depositors to access their money, and supported the Australian financial system from systemic failure. A limit of $250,000 was set.
Protection of consumer financial services
A law was passed with the sole intention of further protecting the investment of customers. There were two tiers, including Generic consumer regulation and industry-specific consumer regulation. The latter was anchored under the Corporations Act 2001 and the National Consumer Credit Protection Act 2009. Its introduction was supposed to assist users with accessing and assessing credit offered to consumers.
5.0 Effectiveness of the measures taken
The Protection of consumer financial services was found to have improved lending and mortgage broking services. The law aimed at licensing responsible credit facilities for several people who need them. The National Consumer Credit Protection Act 2009 (NCCP Act) achieved the objectives.
Interest rates were reduced, as noted above, by as much as 100 points in the hope that it would stimulate economic activity in the country that had slowed down following the financial crisis. This was especially indicated by the weak exchange rates of the Australian Dollar against major currencies, which indicate the competitiveness of the local economy. According to Pickering (Pickering, 2015), the monetary policy on interest that was seen as expansionary was wrong and has little value given the current economic situation. The Australian Dollar was too strong to compete internationally, and as a result, it failed to support the mining sector, which is a key indicator of the economy. To reach the expected results, it needed to fall by 15% to 20%. The author concluded that this monetary policy adopted was not accommodating.
Borio and Hofmann (2015) noted that monetary policy is less effective when interest rates are persistently low, which explains the case for failure to jumpstart the economy as was expected. Among the many reasons for this is an already impaired banking system, poor allocation of resources, and high uncertainty, which cannot be resolved by interest rates. Additionally, Koehler (2012) observed that the decision of the RBA to increase interest rates by 1.75% in 2009/10 was ill-advised as it led to the Australian dollar rising from 65 cents in 2009 to 110 cents in 2011. This led to making the economy less competitive.
An increase in bonds aimed to increase liquidity in the economy as another change that was proposed and implemented by the Australian Reserve Bank. Black et al. (2010) noted that the bond market worked well and measures to increase its issuance of bonds. There has been an exponential increase in bonds over the last decade to 2007, from $110 billion to $750 billion, but lagging investor confidence slowed this pace. Investors were uncertain about their investment in the bond market. There was less appetite for bonds, and the Reserve Bank needed to motivate them to take this opportunity to invest in these instruments. Introduction of the Government's Guarantee Scheme for Large Deposits and Wholesale Funding bolstered consumer confidence, and the spread for bonds increased as a result. A total of $25 25bilion was injected into the economy to enable the markets to function optimally, and this happened as was indicated in the behaviour of bonds during this time.
The Government's Economic Security Strategy included funding several sectors of the economy, including, among other measures, the provision of $4.9 billion as a down payment for pensioners, funding first-time low and middle-income home buyers with $3.9 billion, and $187 million to create 56,000 training places in the Productivity Places Programme. These led to increased economic activity in the country as opposed to the lull that was experienced due to the financial crisis. Such measures can be said to have been successful following the competitiveness of the economy as was envisaged. Budget (2010) noted that in October 2010, Australia’s economy was ranked in the top four positions out of 134 countries. This measured, among other aspects, the soundness of banks and the performance of subprime mortgages. Additionally, Schneiders (2014) added that unemployment had doubled since the financial crisis, indicating the failure of measures to rejig the economy.
6.0 Policy recommendations
Australia’s monetary policies aimed to cushion the economy from the vagaries of economic crisis. A reduction of interest rates by 100 points, followed by an increase of 1.75% in 2009/10, led to an increase in the Australian dollar against major currencies, leading to a loss of competitiveness. It is recommended that the rates be kept as low as possible to ensure investors can access credit facilities to invest in other sectors of the economy. The banking sector should also be competitive, and this can be done by removing some privileges assigned to some banks. A competitive banking sector can make interest rates affordable and lure investors in various sectors of the economy.
One of the policies was of low interest rates that spurred high demand for mortgages and increased prices for houses. There is a need to maintain “tight macro-prudential policies” to ensure the prices are not too high for the reach of especially low-income and middle-income earners. The government should be actively involved in the subsidization.
7.0 Conclusion
The report analysed the effects of the financial crisis in 2008/09 in Australia. Effects such as unemployment in the country that were said to be low since the financial crisis, and low productivity levels, as investors held to their cash, were uncertain about the economic climate. The share market was also lull. Some of the measures taken included lowering interest rates, but these were later adjusted upwards, a move that led to an appreciation of the Australian dollar. Recommendations include an increase in government involvement, especially in the housing market, and a lowering of interest rates.
8.0 References
Australian Office of Financial Management, 2009. Issuance of Commonwealth Government Securities.
Black, S., Brassil, A. & Hack, M., 2010. The Impact of the Financial Crisis on the Bond Market.
Borio, C. & Hofmann, B., 2015. Is monetary policy less effective when interest rates are persistently low?.
Budget, 2009. Part 2: The Government's response to the global financial crisis.
Budget, 2010. Part 2: The Government's response to the global financial crisis.
Eslake, S., 2009. The global financial crisis and its impacts on the Australian economy.
FCS, 2008. About the Financial Claims Scheme.
Glennen, C., 2017. Recession-proof Australia.
Kennedy, S., 2009. Australia's response to the global financial crisis.
Kohler, A., 2012. Monetary policy is losing its power.
Pickering, C., 2015. Has monetary policy failed Australia's economy?.
Schneiders, B., 2014. Long-term unemployment in Australia has doubled since the global financial crisis.
Swan, W., 2013. Increasing commonwealth government securities to support Australia's financial markets.
Zappone, C., 2008. RBA stuns with massive rate cut.
Zappone, C., 2008. Worst day in 21 years.
