Why Australia economy is good, but not great

With just two weeks to go until the end of the financial year, leading economist Craig James saw it is an opportune time to review how our economy and financial markets are faring compared with the rest of the world.

In a recent bulletin this is what the chief economist at Commsec had to say:

First, our economy is lagging. Certainly a key reason has been the floods and cyclone earlier this year that produced the biggest decline in economic activity in 20 years. Currently Australia’s economic growth rate of 1.0% ranks as fourth weakest of 42 countries tracked by The Economist magazine. The only weaker economies are Greece (-4.8%), Japan (-1.0%) and Spain (+0.8%).

Australian interest rates also remain the highest in the advanced world. Three-month rates are just below 5%, well above the US (0.12%), Japan (0.16%), UK (0.83%) and Europe (1.43%). Australia has the 14th highest interest rates of 42 countries tracked by The Economist.

Australia’s budget position is good, without being great. The poll conducted by the Economist Intelligence Unit suggests that Australia will have a budget deficit of 2.3% of GDP in 2011, ranking it 17th of 42 nations.

The Australian dollar has certainly been amongst the strongest currencies in the world over the past year. When expressed in Aussie dollars per US dollars (rather than US dollars per Aussie dollars – it matters!) the Aussie dollar has lifted just over 20% against the greenback. The Swedish krona, Swiss franc, Hungarian forint and Czech koruna have recorded similar gains over the past year.

The list of the weakest currencies over the year is dominated by countries from Africa and the Middle East.

The Australian sharemarket is still higher than a year ago, but other countries have clearly done much better. In local terms Australian shares are up around 7% over the financial year, putting our bourse in 51st position of 72 countries tracked. The stronger Australian dollar has clearly crimped interest and returns. Other countries with strong currencies have also had under-performing sharemarkets.

The strongest sharemarket gains have occurred in Sri Lanka (up 59%), followed by Argentina (up 42%) and Russia (up 37%). The US Dow Jones is up 22% from June 30 2010.

It certainly has been an interesting first half of the year and I intend to keep you up to date with all that’s going on in the world of property as well as give you an overview of the economy in future blogs.

Craig James is chief economist at Commsec.


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