The Impacts Of The 2008 Global Financial Crisis (GFC) On Australia And Government Policies To Stabilize The Economy

Analyse the impacts of the 2008 global financial crisis (GFC) on Australia and how did Australian government use macroeconomic
policies to stabilise the economy.

Causes and consequences of the GFC

This study is aimed at establishing how the Australian economy was impacted by the 2008 GFC and how it responded to put the situation under control. This crises was noted to have significant negative impact on nearly all economies in the whole world. Many nations went into a recession and recorded a significant fall in GDP and unemployment rose. Productivity on nearly all economies was greatly discouraged. The increased level of unemployment resulted in a greater fall in aggregate demand (Bray, Waring & Cooper, 2009). While some economies were greatly impacted, economies like Australia managed to escape the recession with minimal negative impacts. This paper will analyze the fact behind the successful escape of Australia from the global financial crisis. Governments implemented both fiscal and monetary policies to stimulate their economy. Australian government also implemented policies towards the same. The paper will also determine the effectiveness of the policies that the Australia government employed during this period. This study will therefore create insights on the most effective policies that should have been implemented by other economies and will create a basis for future control and avoidance of recessions.

An economy’s growth and development is stimulated by the banking sector as it serves as a channel of transmission of resources to the real sector. Through it, investors and households are able to access financial services. It improves efficiency for the financial intermediaries. This paper will begin by covering the causes and consequences of the GFC and then the response that were implemented. The paper will determine whether fiscal policies are superior to monetary policies during such a recessionary situation. The paper will also determine whether Australia continued with its previous growth rate after escaping the GFC or it later came to experience some negative impacts. This is because most countries are suffering the impacts until today; they have not yet achieved a full recovery.

According to Davies (2017), the global GFC is believed to have begun in 2007 (July) when American investors lost confidence in sub-prime mortgages’ value. So the original origination of the GFS is in the US. This resulted in a liquidity crises from which the GFC devised. As a result, there was a huge injection of capital by the US Federal Bank into the financial markets. The crises worsened upon the sudden decline of global stock prices in September 2008 (Rudd, 2009). Many initial borrowers defaulted on their loans, banks tried to repossess the houses and land but by then they ware of less value on the market and thus the bank wasn’t able to raise the initially loaned amount (Murphy, 2011). The collapse of Lehman Brothers in September 2008 created challenges on government around the world on an attempt to come to a rescue. There was a great loss of confidence by the investors.

Impact of GFC on Australia

Just like any other stock market was falling owing to the GFC challenges, the Australia equity market was not an exception, it also fell significantly. Even the countries that were insulated from the GFC experienced a fall in the stock market. In 2007, the S&P/ASX200 index had reached a peak of 6700, but in November 2008, the index had fallen to 3400. Since the exposure of Australian local banks to Collateralised Debt Obligations (CDOs) was small relative to other countries, Australia was initially thought that it would fare much better (Thangaraj & Chan, 2012). Debelle (2008) noted that the Australian housing market strongly positioned with non-conforming loans since it only accounted for 1%; he compared this to 13% accounted in the U.S.

Fig: Australian Housing price index 2002-2018

Source: Tradingeconomics.com (2018)

The graph represents the Australian housing index from 2002 to 2018. As it can be observed, the index reached a peak in 2003, fell gradually in 2014, the next peak was reached in 2007, then the GFC came in and there was a gradual fall. Australia recorded the lowest housing index in 2008. The economy’s housing index recovered to a new peak in 2010 higher than that of 2007. However, this was followed by a gradual fall in 2012 and a trough almost equal to that of 2008 can be observed. The economy recovered again to a new peak in 2015, lower than that of 2010, but equal to that of 2007. Currently, the Australian housing index is falling. The overall trend is negative. There are four sectors in which the Australian construction supply chain is divided. These are; construction companies, material suppliers, real estate investment trusts (REITs) and property developers. Construction companies and material suppliers were found to have been impacted the least. However, the REITs and Property developers were severely impacted owing to the fact that they were highly leveraged. The valuation of assets had greatly decreased during the GFC and thus REITs and property developers’ profitability was reduced.

Fig: Australian Unemployment Rate

The unemployment rate in Australia has been relatively high during the period 2002 to 2018. This is also indicated by the positive trend. However, the economy had started experiencing low unemployment rate before the GFC. But since the rate rose during the GFC, it’s still high until today. After the period where most economies were believed to have had a sound recovery (2010), the Australian unemployment rate was falling, but started rising on the following year. The high unemployment rate could only have been brought down by the creation of many jobs, but there still exist many challenges towards achievement of the same. Some of these challenges are the unavailability of loans to the SMEs. This is also part of the greatest impact that Australia experienced during the GFC period.

Australian Government Policies to Stabilize the Economy

Fig: Australian Real GDP Growth Rate

Source: IMF.org (2018)

The graph represents the change in Australian real GDP for the period 2002 to 2018. The overall trend is negative. For the period before the GFC, Australia is observed to have had the highest real GDP growth rate with the highest peak value reached in 2007 when the crises started. The highest level was 4.5%. During the GFC, the Real GDP growth rate fell significantly to its lowest level to 1.8% in 2009. After the GFC, the highest Real GDP growth rate recorded in Australia was 3.5% in 2012. Since 2012, the rate has averaged at 2.8%. This shows that the aftermath of the GFC are still haunting this economy. Pickering (2014) noted that many economies are still struggling with low economic growth rate that have persisted ever since the GFC took place. He noted that this is risky for economies as a small backslide may get the economy into a very bad condition. Productivity for many economies have not yet recovered, this is the reason why many countries are struggling with the unemployment problem.

The stronger Australian housing market and the low exposure to toxic debts did not prevent the Australian GDP from falling. There was a significant decline in Australian GDP during the 4^th quarter of 2008. On the 3^rd quarter of 2008 (September), the economy had already experienced a 10% reduction in building construction commencements. This is because banks and other financial institutions had already tightened their credit such that it was difficult for investors to secure loans for investments (Henry, 2010). The diminishing building commencements resulted is three subsequent quarters reduction in total building output. Similar to other industry impacted by the GFC, the Australian property market was performed poorly. ABS (2010) noted that there was a 22% fall in owner occupied commitments from December 2007 to December 2008. The major factor underlying this fall is the increased unemployment rate and the reduced market confidence. Australian office property developers were reported to have experienced a decline in revenue accounting to 20.6% for the financial year beginning 2007, and ending in 2008 (IBISWorld, 2011a). The reduction of consumer spending also affected the retail market.

Another impact which is as a result of the GFC aftermath is the inability for a small to medium enterprises (SMEs) to obtain finance from financial institutions. This is worse especially for those who are venturing it new businesses. Financial institutions and banks are less willing to advance credit to borrowers who need to start up a business. This has greatly impacted the health of economies as the potential investments are not taken. The small businesses are left only with an option to source funds from family and friends, credit cards or from personal savings. The inability of this small businesses to obtain capital has limited the rate of job creation which has resulted in unemployment going up.

Effectiveness of Policies

Despite, the stimulus packages in Australia, there are many businesses that went bankrupt during the GFC. Mazzarol (2012) noted that in Australia only micro enterprises were less impacted because their demand for bank loans is low, but the SMEs were in a great problem. SMEs were forced to bankruptcies as a result.   Bankruptcies in Australia rose from 25,249 to 27,509 over the period 2007-2010. Some SMEs started holding cash and postponing investment as a method of avoiding cost and managing cash flows.  In order to avoid getting into more trouble banks all over the world including Australia raised their credit standards. This was to ensure that the problem of irresponsible lending which was the origin of the GFC is fully eliminated.

Even with all the measure employed by the Australian government, not all sectors benefited. There has been raised some concerns pertaining the social impact of the GFC (Saunders & Wong, 2016). Many studies suggested that the lower income group and other people who rely on social welfare support felt some adverse effects (Saunders & Wong, 2016). The studies were assessed based on how people perceived the impact, whether their well-being was altered, and the changes in financial stress, changes in economic inclusion and deprivation. The results may be indicating that the social impact of the GFC may have been small, but evidence suggests that those who were not well off before the crisis became adversely affected. There could be a high degree of increased inequality in the Australian standard of living as an aftermath of GFC

Kevin Rudd the Australian prime minister and Wayne Swan the treasurer during the GFC delivered their budget emended to include the response to GFC. During that period, this economy was faced with the problem of inflation and thus was on a constant fight to control it. The Reserve Bank of Australia (RBA) was the first to implement a significant macroeconomic policy as a response to GFC. It was on 7^th October 2008 when the RBA decided to have the interest rate cut by 100 basis points; this lowered the rate to 6%. 5 days after the interest rate cut, which was on 12th October 2008, a guarantee on all bank deposits in Australia was announced by the government.

The government after two days again announced a stimulus package of AUD10.4 billion. On these AUD10.4 billion, AUD1.5 billion were meant for supporting the construction of houses. The housing stimulus took effect immediately where first home buyers were given a time=limited grant. This offered great benefits to the construction companies and the material supplies. The grant for the first home buyers was doubled from $7,000 to $14,000 for existing homes, and for new homes it was tripled to $21,000 (Davies, 2017). The AUD 10 billion included payments to seniors, families and carers. This payments were made during the Christmas spending and there was a great stimulation of aggregate demand as reported by strong sales by retailers. A helping hand was also given to the automotive industry following the withdrawal of several major lenders; the banks were the only option left to fill the lending gaps.

Social Impact of GFC

The Australian government had a view that the GFC may extend longer than what was projected and thus in order to prepare for the same, in early December, it announced a tranche of AUD4.7 billion to commence large-scale projects on infrastructure. The Australian government announced the second stimulus package of AUD42 billion on 3^rd February 2009. This package was titled Jobs Plan and Nation Building (Commonwealth of Australia, 2009). Since the GFC was projected to extend and become deeper, 70% of the AUD42 billion package which was equivalent to AUD14.7 billion was to be spent on schools, AUD6.6 billion to be spent on social and defense housing, AUD3.9 billion on energy efficiency measures, and finally AUD890 million on rail, roads and other small-scale infrastructural projects in the community (Thangaraj & Chan, 2012). On the 3^rd phase of infrastructural program, the government announce a further AUD22 billion. The stimulus packages initiated in 2008 resulted in an increase on building by the 3^rd and 4^th quarters of 2009. The Nation Building element of the Australian government’s stimulus package was accounted for 23,600 projects (Thangaraj & Chan, 2012).

The US president Barrack Obama proposed $1 trillion to be spent with an aim of controlling the financial crisis. This was on January 2009. During this same period, the Australian government also made a proposal for a stimulus package where it pledged to give the tax payers some cash handouts and also to increase its spending on long-term infrastructure projects (Davies, 2017). As a response to the problem faced by the SMEs, the Australian government raised grants. Otherwise, the government should have introduced a system where they lend directly to them or exempt them from tax payments. This would have greatly promoted the creation of new jobs. However, compared to other nations, Australia was still able to create some significant number of jobs during the GFC. On the other hand, the response to the social impacts was to be addressed by the cash handout that were to be advanced to the poor group and those relying on social welfare programs.

Conclusions

The impacts of the 2008 GFC are still experienced today through the challenges facing the intermediary role of the banking sector. Since the GFC was accused to be as a result of deregulation of the banking system, the paper have confirmed that there has been the implementation of strict rules and regulations on this sector. As many people had argued, following all the stimulus packages announced during the GFC, this economy has been proved to have been quite insulated from the GFC. However, the economy was not immune as we have seen that some of its sectors experienced some downturns.

Expansionary fiscal policy that involves an increase in government expenditure seems to be the most effective policy to stimulate an economy from poor performance. After the GFC, many countries were reported to raise their spending especially on long-term infrastructures. The most important secret behind the success of Australia in implementing its policies is how it was timely in its implementation. For instance advancing payments during the Christmas period was appropriate since people need to spend highly during this period. Furthermore, it directed resources mostly to the falling sectors. Economies should use the Australian tactics of policy implementation if they need some guaranteed stimulation.

References

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Debelle, G. (2008). ‘A Comparison of the US and Australian Housing Markets. Reserve Bank of Australia Bulletin’, June 2008.

Henry, K. (2010). “The Australian Financial System – Emerging from the Global Financial Crisis: Address to the Count Financial Conference, Canberra.”

IBISWorld Pty Ltd. (2011a) ‘Office Property Operators in Australia’, Melbourne.

Mazzarol, T. (2012). Financing the small business sector: what has been the impact of the GFC? Retrieved from https://theconversation.com/financing-the-small-business-sector-what-has-been-the-impact-of-the-gfc-6894.

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