Presented by Jones Partners
Between 1973 and 2023, Australia’s economic management underwent a complete transformation. The end of the Second World War marked the beginning of economic expansion and flourishing productivity for Australia and much of the developed world. Many credited this transformation to the rise of Keynesian economic policies, manifesting through an increase in global cooperation, economic management, the rise of monetary policy and fiscal spending. However, the early 1970’s brought a new wave of inflationary dangers, that were severely underestimated by governments around the world. In 1973, things got considerably worse, by the imposition of oil embargos, reduced production and price increases by the Organization of Arab Petroleum Exporting Countries (“OAPEC”). OAPEC were responding to global inflation trends, whilst seizing two opportunities; to increase its revenue (and restore the real value of oil) and punish the United States for funding the Israeli military during the Yom Kippur War. Almost immediately, oil prices quadrupled. Inflation was quick to follow.
This led to a period of global economic uncertainty. Many have been quick to blame Australia’s downturn on poor budgeting, reckless real wage surges and tight credit schemes implemented by Whitlam’s Labor government. Whilst certainly a contributor, a more pertinent factor was Australia’s significant dependence on the United States economy. Australia was hesitant to forge new relationships with Asian nations, a decision which proved detrimental, after the US economy tanked under the pressure of sky-high oil prices, the cost of the Vietnam War, and the “Nixon Shock’, (the end of the gold standard commodity reserves). Between 1973-1983, Australia entered a period of stagflation, with inflation and unemployment both exceeding 10 per cent, a far cry from Australia’s current inflationary target of 2-3 per cent.
As we approach the end of 2023, Australia is once again confronted with several, similar challenges. Earlier this year, OPEC (Organisation of the Petroleum Exporting Countries) made significant cuts to oil production, and war continues to wage on in Ukraine, disrupting global supply chains. Australia is also exiting the pandemic years, a period of extensive fiscal spending, low interest rates and slowed economic activity. Despite these concerning parallels, and a somewhat bleak economic outlook for 2024, Australia is in a strong position to effectively manage these conditions. Since the 1970’s, Australia has undergone a remarkable transformation, with sophisticated labour and financial markets and fiscal and monetary policy.
The lessons learned over the past 50 years have transformed Australia’s economic management. Whilst other nations descended into recession after the 2008 Global Financial Crisis (“GFC”), Australia’s economic growth persevered, supported by government stimulus, robust lending standards and large resource exports to China. Australia successfully regulated the macroeconomic impact, reducing the duration and severity of the GFC on the Australian economy.
As the pandemic increasingly becomes an event of the past, Australia is once again facing inflationary pressures. There has also been a notable increase in insolvencies this past year, with the current climate presenting many challenges for businesses. However, much of this increase can be attributed to the legacy of the pandemic, and the suspended activity of the ATO in pursuing statutory debt. The current statistics are indicative of a backlog of insolvencies, and a systemic correction.
Despite these obvious challenges, a recession (for now) has been averted, inflation is showing signs of easing, and unemployment remains surprisingly low, at 3.6 per cent (as of 6th December 2023). With many Australians struggling in the current climate, a historical comparison can provide some important perspective on the increasing sophistication of Australia’s economic management. Australia’s economic institutions and frameworks are far from perfect, but their robust nature and historical success is a strong indicator for renewed prosperity in future.
Keen to read more? See our blog on the function of a recession within the business cycle