Impacts Of The Global Financial Crisis Of 2008 On The Australian Economy

The global financial crisis of 2008

The global financial crisis is one of the biggest economic crises experienced by the world after the great depression of the year 1929. The global business crisis that generated in the year 2007 from an ill operation of financial markets of the USA impacted almost all the economies of the world. The economies which were closely associated with the economy of the USA at that time experienced the most destruction in terms of effects. The crisis resulted in the reduction of the overall aggregate demand for the goods and the services in the world economy. Australia is also among the closely associated economies of the USA and hence it experienced the effects of the global financial crisis. Despite the fact that, the economy of Australia was going through a mining boom at that time, the repercussions ended up affecting the system of the Australian economy. The objective of this paper is to discuss the impacts of the global financial crisis of the year 2008 on the economy of Australia.

The global financial crisis of the year 2008 is one of the biggest crises the world economy experienced after the great depression of the year 1929.  It is important to note that despite the efforts of the Federal Reserve and the government of the USA, the crisis became widespread. According to Balakrishnan et al. (2016), the most crucial reason for the failure of the economy was due to the huge amount of money creation by the financial institutions of the USA. Bank at that time provided loans to anyone who applied for it even to the risky borrowers. Consequently, the housing prices in the country increased so much that huge amount of investment in that sector came in. However, eventually, the high amount of loans became impossible for the borrower to pay and hence the housing price fell sharply. The economy of the USA suffered a high debt level that eventually contributed to one of the greatest economic crisis that the world has faced. These impacts of the economic crisis were not limited to the USA only (Claessens and Van Horen, 2015). Countries such as Australia, Canada, UK and many other parts of Europe experienced the effects of the crisis.

The first sign of effect from the global financial crisis was seen in the middle of the year 2007. Larder et al. (2015) stated that at this point, the credit market of the world was full of the subprime lending. However, this is important to note here that the impact of the global financial crisis on the economy of Australia was less compared to other countries of the world. While different other countries such as the UK and Canada showed the signs of fall in the GDP of the country, the GDP growth rate was steady in the case of Australia. However, the growth rate of the Australian economy was certainly affected by the global financial crisis of the year 2008. In the year 2006, the growth rate of the Australian economy was around 1.2& which fell sharply during the global financial crisis and was around 0.2%. However, according to Dijkstra et al. (2015), the effects of the global financial crisis failed to put the economy in a recessionary phase which it had done in the case of other countries. Apart from that, the economy of Australia also showed steadiness in terms of the unemployment rate as well. Rather the unemployment rate of Australia showed a decrease during the financial crisis of the year 2008.

The impact of the financial crisis on Australia and its economy

This is due to the fact that, the economy of Australia was also experiencing a mining boom at the same time as well. Lane and Milesi-Ferretti (2017) highlighted that the latest mining boom in Australia has been one of the best rewarding mining booms till date due to the availability of the globalisation and the foreign investment. During that, time, the decrease in the unemployment due to the mining boom outplayed the increase in the unemployment due to the financial crisis. The financial markets of Australia, on one hand, saw a reduction in the overall workforce during the financial crisis. On the other hand, the mining boom lowered the unemployment rate thereby providing impressive job opportunities in the mining and the manufacturing sector of the economy.   

It also needs to be noted that, the characteristics of the Australian economy is different from the other affected economies as well. According to Bénétrix et al. (2015), the main differentiating factor between the Australian economy and the other economies of the world is that the economy of Australia is very resilient. This was even truer during the financial crisis as the parallel mining boom in the country provided a support to the government. The government of Australia did not require any monetary policy to boost the aggregate demand for the goods and the services in the market. In this context, the government of the USA used the government spending heavily in order to have the aggregate demand of its economy in right place. Correia et al. (2015) noted that the main event that triggered the recession in the world was the lack of aggregate demand. The investors were wary of making any kind of investment in that situation. However, the picture was quite different in the case of Australia which showed a steady inflow of the foreign fund in the mining and the manufacturing industry of the economy. 

Nevertheless, the economy of Australia was not totally immune to the global financial crisis as the impacts reduced the wealth of the household. Kenourgios and Dimitriou (2015) stated that, during the financial crisis of the year 2008, the demand for the equity in many different companies fell sharply and so the equity prices. This resulted in the 9% reduction in the household wealth of Australia. However, the impacts of the crisis did not last for many months in the case of Australia as the equity market bounced back steadily after the year 2009. This support mechanism of the Australian economy at that time can be attributed to the economic situation of Asia as well. Asia is one of the continents, which on an average did not feel the effects of the global crisis (Chen et al. 2015). Apart from the countries such as Singapore, most of the other countries remained slightly affected or unaffected by the global financial crisis of the year 2008. This, in turn, has reflected in the mining export of the county during the period of the global financial crisis. 

Another area, where the Australian economy got affected due to the global financial crisis of the year 2008 is the value of the Australian currency. Bremus and Fratzscher (2015) stated that the value of any currency depends on many of the factors that include the import, export, inflation and the government policy. The value of the Australian currency during that time fell sharply by around 30%. One of the characteristics that the foreign market showed at that time was the lack of liquidity in the market. The reserve bank of Australia reacted with a policy change in order to increase the liquidity of the Australian market which eventually resulted in a devaluation of the Australian dollar. However, it needs to be noted that the Australian dollar is among the very few currencies that showed the sign of appreciation after the year 2009. Daher and Le Saout (2015) noted that the mining boom in the economy of Australia worked as a shield against the impacts of the global financial crisis of the year 2008. The increase in the export volume due to the expansion of the economy following the mining boom increased the demand for the Australian and hence resulted in an appreciation of the currency.

Mining boom and its impact

Lastly, the credit and the money market of Australia also showed some signs of effects from the global financial crisis of the year 2008. However, the resiliency it showed during that time was impressive. Australia was among the very few big economies that did not require the intervention from the side of the Reserve bank. The reserve bank of Australia did not intervene much in order to get the things fixed. The Australian banking system did not hold any kind of bad loans in the market. Rather the government made sure that financial institute reduces the number of non-secured loan holdings. In this context, Ricci (2015) stated that the great health of the money and the credit market of Australia facilitated to the steadiness and the impressive performance of Australian economy during the time of global financial crisis. 

Although the government of Australia had to bother less about the impacts of the global financial crisis compared to the other economies of the world, it had undertaken few of the measures in order to avoid the ill effects of the global financial crisis of the year 2008. One of the first moves from the side of the Australian government came when the reserve bank of Australia reduced the interest rate by 100 basis points (Košak et al. 2015). The strategic budget committee of Australia also had taken measure in order to avoid the bad effects of the global financial crisis. The prime minister, deputy prime minister and the treasurer of the government were meeting regularly to assess the impacts of the crisis and the policies that need to be implemented to minimise the effects of the crisis. The treasurer of Australia visited the USA at that time in order to be present at the meetings of the IMF and the World Bank. This allowed the treasurer of Australia to have a firsthand view of the economic crisis that generated in the USA (Culpeper, 2018). The treasurer in his stay in the USA also kept in contact with the other parts of the government that helped the Australian economy to become resilient compared to the other large economies of the world.

Assessing the impacts the government of Australia further implemented policies seeing the horrific situations in the USA. The government of Australia first went to stabilise the credit and the money market of Australia and hence it stated that it would provide a guarantee to the Australian banks in terms of deposits and the wholesale funding the Australian banks. Jiang (2015) stated that it was an important move from the side of the government that also explained the reason for the ineffectiveness of the global financial crisis on the economy of Australia. This also helped in keeping a good shape of the Australian banking system. This was important as the inflow of foreign money was crucial for the economic growth of Australia. The mining boom attracted a lot of foreign funds which clearly reflected in the economic performances of Australia. Therefore it was imperative for the government to have a healthy credit and money market in order to ensure uninterrupted financial inflow from the foreign countries. Knowles et al. (2017) noted that it was disadvantageous for the banks to receive such support from the government as they were in a good shape already. The competitiveness of the Australian banks was compromised in order to minimise the effects of the global financial crisis. Thus, the government had taken risks to increase the ease of business in the country and for the betterment of the consumers. Courvisanos et al. (2016) highlighted that it was important for the Australian government to take care of the consumers of the economy in the wake of lowered aggregate demand in the world economy.

Resilience of the Australian economy

Additionally, the government of Australia had also taken other financial measures to maintain a healthy aggregate demand in the economy. One of the crucial policies that were announced by the government during the global financial crisis was the $10.4 billion stimulus package which included a bonus for the pensioners and the low-income families of the economy. In order to have a high aggregate demand, the consumption components need to be taken care of (Richardson et al. 2015). The government also sanctioned fund worth of $1.5 billion for the support towards the housing construction for the lower segment of the population of the country. The government in the subsequent time found out the weak areas of the economy and provided support so that it does not become vulnerable to the changes in the world economy. The housing and the real estate market is the sector that was associated heavily with the crisis. The housing and the real estate market also accounted for 60% of the economy of Australia at that time. Therefore, boosting this sector in order to avoid any similar consequences justified the actions of the government.

Furthermore, the risk of increasing unemployment was also the concern of the government. Muhammad et al. (2015) noted that the increasing unemployment may lead to lack of aggregate demand and hence all the prior actions of the government would fail. Therefore, the government of Australia went to support the workforce of the country specifically that had the potential not only to have a higher productivity but also a higher contribution for the aggregate demand for the goods and the services in the economy. The previous action of the government also had helped the Australian economy to avoid the ill effects of the global financial crisis. For example, the decision of the government to turn the exchange rate into a floating on in the year 1983 was proving to be one of the best decisions ever (Balakrishnan et al. 2016). The depreciation of the Australian currency helped in curtailing demand in the good time while it also helped in supporting the aggregate demand in the bad times of the economy.

Conclusion

Therefore, the global financial crisis had affected countries all across the globe especially the countries that were associated economically with the economy of the USA. The Australian economy also became a victim of the crisis given the fact that the economy of Australia is highly associated with the economy of the USA. However, as per this study says, the impacts of the global financial crisis on Australia was way smaller than the effects it had on the other big economies of the world. The success of the economy in avoiding the ill effects of the crisis attributes to the ongoing mining boom of the country. Apart from that, the appropriate government policies have also helped the government to become resilient and immune during the global financial crisis of the year 2008. The main concern of the government was to have a strong aggregate demand in the economy that was missing from the global economy and resulted in a dysfunction in the world economic system. The strategies of the government coupled up with the impressive performances in the mining boom phase made sure that the economy of Australia manages to deal with the crisis in a better way than most of the economies of the world.

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