Australia shines as Asia-Pacific’s low-risk economy

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.

Gentle acceleration

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 ramps up.

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.

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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.

  1. Demand risk. 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 rankings.

    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 business.

    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 housing market.

  2. 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 global rankings.

    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 2–3%.

  3. 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.

  4. Sovereign credit. 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. [1] 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.

  5. 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 seventh globally.

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 investment.

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[1] Refer to Budget 2019-20 Overview, Appendix F, page 38, and Charter of Budget Honesty Act 1998