Australia’s economy hopping, Canada’s limping, along

By Todd Hirsch Last week the country of surfers, spiders and kangaroos turned some heads in the global financial markets. Australia's central bank raised interest rates. That's right, it raised rates . . . tapping on the economic brakes just as most other countries around the world are still stepping on their economic accelerators.

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The press release from the Reserve Bank of Australia was peppered with cheery notes like: “Economic conditions in Australia have been stronger than expected and measures of confidence have recovered,” and “Housing credit growth has been solid and dwelling prices have risen appreciably over the past six months.” What's going on down there? Didn't they get the memo about the global downturn? Australia is one of only two OECD countries that didn't slip into recession in this latest global downturn. Recently, the country has posted some of the biggest job gains in two years with an increase of 41,000 jobs in September alone. The unemployment rate has fallen to 5.7%. Investment in the country has continued quite strongly, and the Australian dollar has been one of the star performers over the past few months. Canada and Australia have a lot in common. They are both medium-sized economies with thin populations spread across an enormous, unforgiving geography. They're both former British colonies, and Queen Elizabeth II remains the technical head of state for both countries. Also, both Canada and Australia were in good fiscal shape going into the global downturn. Having run large surpluses for several consecutive years, the federal governments in both Ottawa and Canberra introduced stimulus programs, and both were able to tip into deficit without impairing their credit ratings. But most importantly, both countries are significant natural resource exporters, particularly base metal mining and energy products. That makes the currencies of both countries extremely sensitive to movements in commodity prices. The similarities, however, end there. While Canada has focused its stimulus on shovel-ready infrastructure projects, a big part of Australia's stimulus spending was on “soft infrastructure” – things like education, innovation, science and technology. According to Justin Brown, Australia's High Commissioner to Canada, these investments in soft infrastructure have done much to lift Australia's economy, particularly as it has increased productivity and innovation in the services sector. Jobs in finance, for example, have blossomed in the past few months. Also unlike Canada, Australia has a relatively small manufacturing sector. This has saved it much of the pain being felt in southern Ontario where mass manufacturers (like the auto sector) have been squeezed under the weight of a global recession, a strong currency, and competition with low-cost countries. But the primary reason why Australia has come through this global recession with little more than a scraped knee is that its economy is linked much more closely to China than it is to the United States. What the US is to Canada, China is to Australia. And after slowing only modestly in early 2009, China's economy is picking up from where it left off in 2008, heading back to double-digit growth rates. It has been importing enormous amounts of coal and iron ore – both big export products from Australia. And according to Justin Brown, the High Commissioner who appeared as a guest this week on Canada's BNN, Australia is investing “big time” in natural gas and LNG (liquefied natural gas) plants, with an eye to cracking open the Chinese market. With the Chinese eager to (literally) clean up its act with respect to carbon emissions, they should prove to be a lucrative market for Australian natural gas. So, with its economy on a roll, Australia's central bank raised interest rates. Could this be a true sign that the global economy has turned a corner? And will other resource-exporting countries such as Canada be next to see rate hikes? Some currency traders seem to think so. We've seen the Canadian dollar rise by nearly three cents against the US greenback this week as speculators anticipate that the Bank of Canada is next in line to raise rates. Yet it remains unlikely that our central bank has its finger on the rate hike button just yet. With Canada's export wagon hitched so tightly to the US, growth here will clearly lag that of our sister down-under. We added jobs in September, yet the unemployment rate is still well above 8%. All this serves to remind us that Canada is still only slowly crawling out of recession, and that rate increases are still probably many months away.

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