Many parts of the world experienced a period of economic downturn in the late 1980s to early 1990s, but Australia remains one of the countries that were hardest hit by the recession. During this period, Australia’s economy experienced its worst economic downturn since the time of the Great Depression. Recession arises from many causes such as rising oil prices, higher interest rates, and falling prices of assets but inflation remains the most common cause all over the world. Therefore, this synthesis seeks to analyze Australia’s recession of the 1990s detailing the reasons and the remedial measures established to restore the restore.
Causes of 1990s Australia’s Recession
Rising Property Prices Financed by Increased Borrowing
Australia’s financial excesses led to a burst, which resulted in the country’s worst recession since the Great Depression. The financial excesses that defined the 1980s reached a height that made the 1990 recession inevitable. Towards the end of the 1980s growth, it was evident that the Australian economy had overstretched in various ways. By the turn of the second half of 1989, the country’s GDP had risen by over 5 percent while the domestic demand rose by 8 percent. The most reliable components in the economy such as expenditure rose at a rate of 29 percent while commercial construction rose at a rate of 22 percent. ( Caggiano, Castelnuovo and Figueres, 2017). Inflation at the time stood at 7 percent. The corporate sector was also rising while its borrowing rose by 17 percent annually. Besides, asset prices increased way beyond their actual value and a reassessment was necessary to stop them from rising, which led to everyone running to dispose them before the prices fell. High interest rate levels did not prevent the rising prices for all sorts of properties such as industrial, commercial, residential, and retail (ibid). The situation left the country extremely susceptible to an economic downturn. Overall, the rising commodity prices, as well as the interest rates, led to the 1990s Australian recession.
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Australian economy had overstretched mainly in the 1980s leaving it vulnerable to any economic storm, and when the international recession hit, the country’s economy suffered devastating effects. The world experienced an increase in oil prices, high rates of unemployment, and reduced wages and salaries. The repercussions of the international recession of 1990 hit many countries particularly those that experienced rapid growth in the 1980s ( Megalogenis, 2017). The 1990s economic downturn came in two waves with the first sweeping across the U.S, UK, Canada, New Zealand, Australia, Sweden, and Finland. The second wave hit the Continental European countries later. Overall, the rapid uncontrolled growth of the 1980s left the economy exposed to external shocks thus causing the recession.
High Interest Rates placed on businesses
Financial institutions in Australia set high interest rates on businesses. Ideally, the lending institutions wanted to slow down the rapid economic growth by reducing the rate of borrowing. The guiding thought was that the high interest rates placed on loans would discourage capital borrowers from taking more loans. The combination of high interest rates and high levels of debt constrained cash flow and at the same time businesses’ ability to make further investment and create employment ( Megalogenis, 2017). The effects spilled over to households as the increase in mortgage interest rates reduced disposable income accessible for consumption. Overall, the increased debts and constrained cash flow paved the way for the 1990s recession.
Monetary Policies
The Australian government tightened more the fiscal policies in response to the prevailing economic overheating and the price boom that dominated 1988 and 1889. The cash rate had reached 18 percent by the second half of 1989 while the mortgage rate had hit 17 percent. Many loans that were taken to finance businesses had hit an excess of 20 percent ( Megalogenis, 2017). The fall of the asset prices made it impossible for companies to pay back their mortgage. In the process of unwinding diverse insolvent businesses as well as property projects, many financial institutions such as the State Bank of Victoria, Teacher’s Credit Union, Western Australia, the State Bank of South Australia, and the Pyramid Building Society among others failed. Moreover, two of the major four private banks suffered huge losses that necessitated recapitalization for continued operation.
Remedial Measures
Australia’s economy suffered immensely during the recession prompting the then Opposition Party of Australia to turn to a renowned economist John Hewson as their new leader. Hewson held the view that the nation was in an economic crisis due to the economic boom that resulted in a high interest rate. To this end, Hewson called for radical changes and formulated a package comprised of a consumption tax policy ( Tyers & Walker, 2016). He also introduced industrial reforms relations in a bid to address the deteriorating economic situation of the country. Importantly, the Fightback policy was officially launched in 1991. The package by the opposition party leader set the economy on recovery, and to this date, some still credit the economic recovery success to Hewson’s package.
Wage increase was also one of the measures that the government established to try and revive the economy that had suffered immensely during the recession. The ACTU advocated for a wage increase. Hawke particularly effectuated the wage increase for all public servants and waterside workers ( Tyers & Walker, 2016). Ideally, wage increase was aimed at increasing consumer power that would, in turn, enable firms to increase their sales volume and build capital once more. The thought behind the strategy was that when businesses make sales and grow capital, they would reinvest in the economy through the establishment of more industries and in the process, create employment opportunities for the thousands of jobless people in the country. Essentially, increasing the consumers’ purchasing power enables money to circulate in the economy as individuals acquire commodities, thus boosting sales and allowing the firms to build capital for re-investment.
The government also introduced the great One Nation policy that aimed at creating jobs for the thousands who had been rendered jobless by the recession. Many industries had closed down or reduced their employees as a way of mitigating the effects of the recession, and in the process, rendering many people jobless. The government moved quick and introduced the Disability Discrimination Act of 1992 alongside the Australian National Training Authority Act of 1992 ( Tyers & Walker, 2016). The government hoped that the Disability Act would enable the disabled persons to remain and enhance their productivity and keep them off welfare. By the turn of 1992, growth had improved even though unemployment was still on the rise.
In May 1994, the Australian government launched an ambitious five-year economic plan dubbed Working Nation. Broadly, Working Nation was established to stimulate regional development, provide an employment strategy, expand trade opportunities, and introduce the new industrial policy. The government assured the public that the policy would bring about economic transformation of the country ( Tyers & Walker, 2016). By year-end, inflation had declined, unemployment remained below 10 percent, and growth continued to show improvement. The countries bad debts balanced out themselves out and relieved the system while the government focused on applying the fiscal stimulus measures.
Increased exportation also enabled the country to defeat the effects of the recession. It is noticeable that during the same time that the Australian recession was coming to an end, China had begun entering into a phase of remarkable economic growth. Ideally, a manufacturing boom in China had created an insatiable demand for both coal and iron ore. Australia enjoyed the benefits and monopoly of supplying the same to China due to its geographical proximity and abundance of the resources. China had a great demand for iron and steel that were crucial for infrastructure development ( Tyers & Walker, 2016). The great appetite for the resources brought about a mining boom as mining companies invested heavily in the construction as well as the operation of new sites while creating thousands of job opportunities in isolated rural Australia. Overall, the explosion of economic activities established a foundation for growth.
In conclusion, the Australian recession of the 1990s remains one of the worst economic crisis to have ever hit the country since the Great Depression. Many factors contributed to the 1990s economic crisis including the high interest rate and the increasing amount of debts. Businesses borrowed loans from major financial institutions for development purposes only to fail in repayment of the same credits, as the prices of assets dropped drastically. The government’s monetary policies also hampered cash flow, which constrained the economy. The rising rate of unemployment and a decrease in wages made the recession inevitable. However, the government established various measures that helped the country revive its economy from the effects of depression such as developing the One Nation policy that created employment opportunities for thousands of jobless individuals. Besides, the government enhanced export business with China, which provided a reliable market for the iron ore that was found in abundance in rural Australia. Overall, the 1990s Australian recession fragmented the economy but also set a platform upon which sound economic policies were established that led to financial stability that the country enjoys to this day.
References
Caggiano, G., Castelnuovo, E., & Figueres, J. (2017). Economic policy uncertainty spillovers in booms and busts.
Megalogenis, G. (2017). Balancing act: Australia between recession and renewal . Black Inc.
Tyers, R., & Walker, A. (2016). Quantifying Australia's ‘Three ‐ Speed’Boom. Australian Economic Review , 49 (1), 20-43.
