WHAT a roller coaster ride it's been in the past week or so.
WHAT a roller coaster ride it's been in the past week or so. The events are so unprecedented that they have now entered the realms of psychology rather than economics.
The great British economist John Maynard Keynes once famously coined the phrase 'animal spirits' to describe the behaviour of otherwise rational human beings in markets, and we're certainly seeing a herd mentality in this bear market after the bulls had it their own way for a long time.
In a very short space of time, the global credit crunch has had a dramatic impact on share prices, liquidity and exchange rates. But how has this affected the Australian economy? Of course, we are not immune here - no country really is - but Australia, more than most developed economies, is in a strong position to ride out the storm.
Firstly, the Australian economy is in a strong position with positive economic growth prospects (2.5 per cent over the coming year according to latest International Monetary Fund forecasts), low unemployment (4.3 per cent, seasonally adjusted), a strong budget surplus and banks that have healthy balance sheets by global standards.
Secondly, Australia's export diversity is also in our favour. Australia's share of goods exports to developing countries has risen from 53 per cent compared to 43 per cent 10 years ago. Australia's trade action is now occurring outside the G7. To date, the emerging markets have been less affected by the credit crisis relative to the US and Europe.
Thirdly, Australia's economic foundations have made us an attractive market for foreign direct investment and our own financial services sector is strengthening in its own right. Australia's financial markets have combined assets of $4.2 trillion and the world's fourth largest pool of funds under management globally (which now exceeds $A1.2 trillion).
Finally, Australia's economic institutions from financial regulation to the labour market have placed us in a good position. We've dealt with our own financial weaknesses before with the state banks and our own external crises (like the Asian financial crisis of 1997) and learned from experience.
However, there is a reason to be concerned on the export front as credit is likely to be restricted in this uncertain environment. This may put exporters at a disadvantage as Austrade research shows that lack of finance is a major barrier to exporting and exporting small and medium enterprises are less likely to receive credit than other SMEs.
However, mitigating this constraint is evidence that exporters are, on average, more profitable than other businesses and they grow faster, are more productive and provide more job security than other businesses.
In addition, the lower Aussie dollar will assist the nominal competitiveness of exporters and the relative attractiveness of Australia as a target for foreign direct investment.
WA has more reason than the rest of the country to be confident. WA's strong resource base will continue to fuel China's expansion, the state budget is in great shape fiscally and first homebuyers and seniors in WA will especially benefit from the federal government's fiscal stimulus.
Overall, Australian exporters successfully dealt with the Asian financial crisis of 1997-99 and the dot.com crash of 2001 due to their own endurance, innovation and ability to forge lasting business relationships and the flexibility of the exchange rate to take on the burden of adjustment to insulate the Australian economy.
With the credit crunch we are in unchartered waters; but the hard work of economic reform, our proximity to Asia - particularly the emerging China and India - and the benefit of experience with past crises, means Australian exporters can have some confidence that they can ride out the storm.
- Tim Harcourt is chief economist of the Australian Trade Commission