Published on August 21, 2014
Skye Mitchell-Innes Investment Portfolio INVESTMENT CLIMATE IN AUSTRALIA OVER THE PAST 7 YEARS With one of the world’s largest economies, Australia’s investment climate is currently stable in comparison to other countries. Australia has comparatively good annual growth, and is becoming increasingly linked with fast-growing economies in Asia. Australia has a diversified economy, including mining, agriculture, financial services and tourism, all of which can be influenced by overseas factors. Over the past 7 years, the Australian investment climate has been affected by the Global Financial Crisis (GFC) which occurred in 2007-2008, although has recovered considerably. The first signs of the crisis in financial markets started in around July 2007, when two funds related to US financial company Bear Sterns announced major issues with their holdings of mortgage- backed securities. Over the second half of 2007, concerns intensified as the bad news spread through credit markets. These concerns caused banks to become less willing to lend money to each other and to hold onto their cash. Although the impacts of the GFC on financial markets first became visible in 2007, it was not until September 2008 that the Reserve Bank of Australia responded. It began with a series of decreases in official interest rates, but as the GFC progressed it began to affect individuals and households, which caused changes in consumer confidence, employment, and income and expenditure patterns. The effect of the crisis on Australia has been considerably less than many other countries, and the Australian economy has recorded better growth outcomes than most other developed economies. However, the local economy and financial markets have suffered. Growth in the economy slowed and the unemployment rate has risen. The most prominent impact of the financial crisis on most Australian households was the large decline in equity prices, reducing the wealth of Australian households by almost 10% by March 2009. Finally, the Australian dollar also weakened rapidly as the crisis grew, declining by over 30% from its July 2008 peak. By world standards, Australia has responded to the GFC fairly well though government stimulus, a resources boom, a responsive reserve bank and pre-existing cost effective standards. The government acted quickly in the second half of 2008 to decrease the impact of the GFC on the Australian economy. Firstly, it guaranteed deposits held by institutions to reassure depositors of the security of their funds and to maintain the banks’ access to capital markets. Secondly, to lessen the reduction in private spending, the government introduced a stimulus package, either in the form of cash handouts to households, infrastructure projects or housing construction. Finally, the Reserve Bank of Australia significantly reduced interest rates to stimulate demand. Australia’s growth has also b een supported through ongoing economic reforms, as well as high practice legal, financial and political systems.