Australia shines as Asia-Pacific’s low-risk economy
24 Jul 2019
The Australian economy faces fewer risks than almost all other major
advanced economies, according to Oxford Economics. In its latest Australian
forecast, the UK-based analyst places Australia 7th out of 164 countries in
terms of freedom from economic risks.
Australia’s stand-out ranking implies economic growth is more secure here
than in comparable countries, which include Canada, China, India, Japan,
Singapore, South Korea and the US. In terms of the unlikelihood of a sudden
downturn, Australia ranks only fractionally behind Germany and Switzerland.
The overall score of 2.2 is aggregated from five different risk assessments: market demand, market costs, exchange rate, sovereign credit and trade
credit. Since these assessments provide an interesting spotlight on
Australia’s comparative performance, I will analyse each in turn below.
Following growth of around 2% this year, Australia’s real growth is
projected to accelerate slightly into the 2–3% range next year according to
Oxford Economics. Trade is partly responsible. Exports will continue to
nudge economic growth higher, as liquefied natural gas (LNG) production
Public sector spending is also expanding strongly and accommodative
monetary policy – that is, low interest rates – is also supporting growth.
Interestingly, Oxford Analytics assesses that the business investment cycle
has turned positive. This implies Australian companies anticipate greater
demand in the future and are – net – investing in expanding output.
Australia’s risk exposure: sector by sector
To understand why Australia’s economy is judged to be relatively low-risk,
it is worth stepping through each of the main risk factors in turn.
According to Oxford Economics, Australia’s score remains low at 3.0
out of 10. Australia’s score is well below the
Asia-Pacific average of 5.0, and puts Australia eighth in global
The assessment comes as Australia entered its
28th year of consecutive annual economic growth, setting a new record among developed economies for uninterrupted
expansion. This enviable record proves the robustness of Australia’s
economy and its reliability as an attractive environment in which to do
In the Oxford Economics assessment, government spending and business
investment will buttress domestic demand, although weaker consumer spending
and residential construction will drag prospects. Downside risks emanate
from a potential fall in commodity prices and a correction in the domestic
Market cost risk.
A score of 2.0 implies a limited risk that rising costs will
constrict economic growth. Australia’s score is significantly lower
than the Asia-Pacific average of 5.8, and places us fourth in
Oxford Economics notes the sharp correction in Australia’s terms of trade
and subdued pace of growth in 2017 has reduced inflationary pressures.
Domestic inflation, as measured by the consumer price index (CPI), is
moderate, averaging 1.9% in both 2017 and 2018.
Oxford Analytics expects inflation to rise as Australia’s economic recovery
matures. Prudent monetary policy will limit the increase of consumer price
rises in the long run, however, guided by the RBA’s inflation target of
Exchange rate risk.
A very low score of 1.6 implies a very limited risk that a change
in the value of the Australian dollar will negatively impact
growth. According to Oxford Economics, Australia’s score is also
low relative to the Asia-Pacific average of 4.4 out of 10. In
global rankings, Australia is in the fifth spot.
Oxford Economics notes, however, that the Australian dollar is viewed as
vulnerable to commodity price movements. In the medium and long term, the
currency is likely to gain support from the expected recovery in commodity
prices – and Australia’s relatively robust growth outlook.
According to Oxford Economics’ in-house sovereign risk model,
Australia scores 2.2 out of 10 for sovereign credit risk.
Australia’s average score for sovereign risk is now the fourth
lowest globally, which is a testament to
Australia’s fiscal prudence
over the past two decades.
The score is based on our relatively low level of government debt,
the government’s strong fiscal position, reduced current account
deficit and strong institutional environment.
Trade credit risk.
Australia’s score of 2.0 implies global confidence in Australia as
a counterparty in cross-border transactions. By Asia-Pacific
standards, Australia’s score is impressive, and we are ranked
Global confidence in Australia is a reflection of the soundness of our
institutions, a well-developed legal system and a business-friendly
commercial environment. Factor in Australia’s astonishing track record for
uninterrupted economic growth, and this background explains why overseas
companies see Australia as an ultra-safe partner in global trade and