Four years after the Global Financial Crisis, global economies continue to suffer from its overhang. In fact, most nations that tried to spend their way through the turmoil have accumulated more debt, threatening their economies and, in cases like the Eurozone, raising dire possibilities for the global economy as well.
Not Australia, however, which late last year earned AAA ratings from all three major international ratings agencies for the first time in its history.
Australia is one of only three countries — the United States and South Korea being the others — among the Top 10 wealthiest that has reduced its overall debt since the GFC, according to a study by the McKinsey Global Institute, the eponymous consulting firm’s research group.
Australia’s total debt-to-GDP ratio fell to 277% in Q2 of 2011. The figure includes private and government debt, which accounts for only 8% of the total. Household debt is the largest component, constituting nearly 38% of Australia’s total debt.
Australia’s experience contrasts with what has occurred in other leading economies that lag in the process economists called “deleveraging.”
In the period since the 2008-09 financial crisis, total debt has grown across the world’s 10 largest mature economies, mainly due to rising government debt. While financial institutions and nonfinancial corporations have reduced leverage by 18 and 12 percentage points of GDP respectively, households have failed to reduce their debt burden and government debt has risen 11 percentage points because of rising social expenditures and falling tax receipts.
“There are no quick fixes – and there may be more bumps in the road ahead. Understanding the interplay between deleveraging and growth can help policy makers and business leaders steer the proper course as their national economies continue to recover from the financial crisis,” said Charles Roxburgh, London-based director of the McKinsey Global Institute.
The Gillard government has received kudos for its fiscal discipline but the World Bank warning on global growth this year suggests Australia might need to do even more to ward off any potential crisis.
The World Bank slashed global growth forecasts to 2.5% this year, down from the 3.6% projected earlier. However, China will continue to grow at over 8%, perhaps shoring up Australia’s growth. But the forecast that prices of commodities will fall by at least 9% should raise concerns.
Regardless, the Gillard government has its task cut out.