And for that matter, how did they avoid the 2001 recession? How come they haven’t had a recession since 1991? Some people suggest they benefited from a global commodities boom, as they are a large exporter of food, fuel and metals. But there was no global commodity boom in 2001-03, and they even avoided recession in a bad commodity year like 1998.
I used to sort of agree with commenters on why Australia avoided the current recession, but then I decided to actually look at the data. And I was shocked by what I found. Australian exports fell sharply during the 2009 global recession:
There are some slight differences in timing (the Australian export boom peaked a couple months later than in the US), but it’s hard to see any decisive differences that could explain why Australia had no recession and the US had the worst one since the 1930s.
Nor can people point to the US housing bubble; a speculative bubble also hit Australian housing. The difference is that their bubble never burst, prices are still higher than in 2006. It may burst someday, but if and when it does it will produce a recession only if the Reserve Bank of Australian lets NGDP growth fall significantly.
In contrast, NGDP data does provide a good explanation for the big divergence between US and Australian RGDP growth. Prior to the recession, Australia had significantly higher trend NGDP growth that the US, and hence significantly higher nominal interest rates. (That’s right; it is NGDP growth, not inflation, which drives nominal rates.) As people like Paul Krugman and Ken Rogoff have pointed out, a higher trend rate of inflation (or NGDP growth, as I’d prefer) will allow you to avoid a liquidity trap. I happen to think we could avoid this problem even without a higher trend rate of inflation, if we did level targeting. But as they say; in the kingdom of the blind the one-eyed man is king. And in the world of the incompetent central bank, the country with 7% trend NGDP growth is king. They were able to use conventional monetary policy, cutting rates until they got adequate NGDP growth.
Australia teaches us many useful lessons (some on the supply-side), but I’d guess we are too arrogant and self-centered to pay attention to those lessons.
PS. There was a small quarterly drop in Australian NGDP after mid-2008, but that was due to the fact that the commodity boom had inflated Australian NGDP in mid-2008. If I’m not mistaken the level of NGDP in 2009 was around 10% higher than 2007; in contrast US NGDP fell over that 2 year period. Remember, level targeting is the key.