The Economist explains: How Australia has gone 25 years without a recession (The Economist – March 16, 2017)

WESTERN AUSTRALIA’S iron ore and Queensland’s coal were at the centre of Australia’s recent mining boom, stoked by the red-hot growth of China’s steelmaking industry. At its height about five years ago, mining investment accounted for 9% of national GDP. But as investment started to decline in 2013, Western Australia’s debt soared.

At 6.5%, its unemployment is now Australia’s highest. If the pattern of earlier booms had followed, Western Australia’s plight would have reverberated around the country and ended in a national bust. Yet the economy’s growth has stayed intact, notching up 25 years without a recession. How has Australia managed a feat that has defied most other rich countries?

Australia’s mining booms over the past 160-odd years made the country feel rich and confident while they lasted. Workers made big money, and this brought prosperity to far-flung regions producing gold, coal, gas and other commodities. Recessions followed nearly all earlier booms, including the most recent one, in the 1980s, largely because the upheaval proved too big a shock for an economy that was highly regulated.

When negative growth was recorded in the third quarter of 2016, some anticipated the start of another recession (technically defined as two successive quarters of negative growth). Yet growth returned in the fourth quarter. The Reserve Bank of Australia, the central bank, forecasts a rate of about 3% this year and next.

The economy has undergone crucial changes since the 1980s. The central bank is now free to set interest rates without political interference and the exchange rate is no longer fixed. As the boom waned, the bank cut its benchmark rate from 4.75% in 2011 to 1.5% last year.

For the rest of this article, click here: