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Upside down Economics

Yesterday, the Reserve Bank of Australia raised interest rates from 3.75% to 4.0%, which is the fourth increase in rates since last October. Yes, I did say ‘raised’ interest rates. While the rest of the world has been digging itself out of recession the Australian economy grew at 2.7% during 2009. This is at a time when other major economies were contracting at anything up to 5%.

In fact, Australia only saw a reduction in GDP in the last quarter of 2008 and as it requires two consecutive quarters of negative growth to give rise to a recession, this means that Australia never fell into recession and has been doing quite nicely, thank you very much.

How has it managed to do so well? Firstly, like many other countries, the Australian government put in place a multi-billion set of fiscal stimulus packages and increased their infrastructure spending. They also put more money into the hands of consumers in order to boost spending. However, they have also benefited from their proximity to China as they provide many of the resources and raw materials which China requires.

Glenn Stevens, Governor of the Reserve Bank of Australia summed up the reasons for another hike in interest rates as follows:

“In Australia, economic conditions in 2009 were stronger than expected, after a mild downturn a year ago. The rate of unemployment appears to have peaked at a much lower level than earlier expected. Labour market data and a range of business surveys suggest growth in the economy may have already been at or close to trend for a few months. There are some signs that the process of business sector de-leveraging is moderating, with the pace of decline in business credit lessening and indications that lenders are starting to become more willing to lend to some borrowers. Investment in the resources sector is very strong. Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year.”

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Posted in Australia, China, economic growth, Interest rates, recession

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