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Australia and the World Economy

I have a column in the Business Spectator, arguing that the transmission mechanism from the world to the Australian economy is mainly via financial markets rather than cross-border trade in goods and services:

While it may seem surprising that export volumes are holding up in the context of a global economic downturn, it highlights the fact that the transmission mechanism from the world to the Australian economy is somewhat different to the one many people assume.

There has been a much closer relationship between the world and Australian economy since the early 1980s, as lower trade barriers have resulted in closer ties with world markets and a larger traded goods sector. However, it is difficult to account for the strength of this relationship based purely on trade linkages.

A more important transmission mechanism from the world to the Australian economy comes from our increased integration with global financial markets following financial market liberalisation and deregulation in the early 1980s. Changes in global interest rates and other asset prices are transmitted directly to the Australian economy via global financial markets.

This has a more powerful and immediate impact on the Australian economy than international trade in goods and services and has been particularly important in the context of the recent global financial crisis.

It helps explain why domestic demand has contracted, even while external demand has proven resilient.

As I note in the column, this has important implications for the effectiveness of domestic policy interventions.

posted on 10 June 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy

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While it may seem surprising that export volumes are holding up in the context of a global economic downturn

Surprising is one way of putting it.

Whether volumes actually held up or not is debatable, given the pricing shenanigans the ABS goes through to calculate volumes.  What’s not in dispute is export incomes are crashing, and its only going to get worse in May when new contract prices and the sharply stronger AUD are reflected in the data.

The trade crunch is yet to come, that’s why its effects haven’t been transmitted to the Australian economy.  You can’t transmit something that hasn’t happened yet!

Posted by .(JavaScript must be enabled to view this email address)  on  06/11  at  02:10 AM


ABARE report (just out) should be able to shed some light on export volumes and income:
ABARE: Australian mineral statistics (PDF)

Posted by .(JavaScript must be enabled to view this email address)  on  06/11  at  04:03 AM


Lets consider these two statements:

fiscal policy has been remarkably ineffective.

...

even while external demand has proven resilient

Now, lets think why external demand has proven resilient?  Could it because a certain country to the north of us has embarked on a massive fiscal stimulus, and has commanded its banks to lend to anyone and everyone.

Posted by .(JavaScript must be enabled to view this email address)  on  06/11  at  05:11 AM


You’re posting at Macro Man now?  Some eye-popping charts over there…

Posted by .(JavaScript must be enabled to view this email address)  on  06/16  at  08:00 AM



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