Australia: rapid growth begins to generate economic problems; U.S. exports look promising in a number of areas - Business Outlook Abroad

Business America, Feb 3, 1986

AUSTRALIA Rapid Growth Begins to Generate Economic Problems; U.S. Exports Look Promising in a Number of Areas The Australian economy is growing rapidly. In the past two and one-half years, the economy has seen 15 percent real growth--which puts Australia's growth rate in this period among the highest in the Western World. At the same time, inflation and unemployment have fallen significantly. Although the 15 percent growth was stimulated by government spending, the Australian government has wisely moved to a fiscal policy restraining the growth in expenditures and the increase in the deficit as well.

Over this period, however, several developments took place which raise serious questions about the sustainability of this rapid growth. External sector foreign debt has risen 100 percent since 1979-80. A sharp deterioration in Australia's current account led to a 20 percent decrease in the value of the Australian dollar relative to the U.S. dollar during the first half of 1985. While the depreciation did provide an opportunity to improve the trade account, a decision to compensate wage earners fully over the next several months for the increased costs of imported goods may fuel already high rates of inflation. Worse than expected current account and inflation figures in November reduced the value of the Australian dollar relative to levels of recent months.

The Australian government's response has been to tighten monetary policy and drive up interest rates. The very high rates, however, appear likely to choke off some investment and dampen otherwise very robust consumer spending. It is becoming less certain that the government's projected 4.5 percent non-farm GDP growth in the July 1985-June 1986 period will be realized, although substantial growth is likely to continue. It is estimated GDP growth will be in the area of 3.5 percent.

Australian economic policymakers will attempt to control inflation and watch the current account deficit change course as the low Australian dollar discourages import purchases, spurs domestic production and makes Australian exports more price competitive. The tight monetary policy established to control inflation and improvement in the current account will not choke economic growth in 1986, although it is not expected to reach previous highs. However, economic uncertainties remain as policymakers try to handle an economy not sparked by government expenditure.

Much is changing in the Australian economy, and many of these changes have importance for U.S. interests. Some of these areas are discussed in the following paragraphs.

Despite the fact that Australia has a labor government, it has pursued some very enlightened market-oriented policies. Most significantly, Australia recently partially deregulated the banking sector, removing many interest rate limits and allowing the entry of 16 new foreign banks, five of which were U.S. banks. Chase Manhattan and Citibank are moving rapidly into the retail banking sector and beginning to provide competition for what was a rather entrenched banking system. The penetration of these and other banks will increasingly tie Australia more closely to international financial markets, and make financial transactions easier for U.S. firms.

The floating of the Australian dollar, which occurred some 18 months ago, has significant implications for U.S. investors and exporters. Given the thinness of the market for the Australian dollar and the weakness in Australian external payments accounts, continuing gyrations in the value of the Australian dollar relative to the U.S. dollar can be expected. The swings during the past six months have been fairly wide--from a high of US$0.72/A$1 to a low of US $0.62/A$1. Particularly in the investment area, care will need to be taken to time the transfer of funds. Our general view is that the low value of the Australian dollar at the moment may offer U.S. investors significant opportunities. However, it must be emphasized that lack of knowledge of the Australian economy in Europe and the United States often leads to misinterpretation about the significance of economic news and consequent rapid swings in the value of the currency.

Australia has consistently welcomed foreign investment, but has required that nearly all significant investments be subject to approval by the Foreign Investment Review Board. Most investment proposals, however, have been approved. There are continuing efforts being made by the Australian government to attract foreign investment in a variety of sectors. Recently a series of investment liberalization decisions were announced which, while not exactly sweeping in their impact, served to "gently" relax the controls the government of Australia has over inward foreign investmnet. The actions included:

* Eliminations of the requirement that foreign investors publish in advance take-over plans for privately held Australian business or real estate. (This measure should significantly speed acquisitions.)