By Pierre G. Villere
This time last year, the business press was having a field day with their occasional Chicken Little prognostications that the economy was headed into recession, and the talking heads on the business news cable networks were the worst. Their bearish view, derived from the tiniest of economic indicators, threw the stock market into a tailspin the last couple of months of 2018, which continued into the first part of 2019, giving pause to the entire economy.
At the time, I shouted over and over again they were wrong, and it turns out they were. As a matter of fact, the markets rallied, as the Dow Jones Industrial Average bottomed out in late May, and added a whopping 3,000 points by the first part of 2020. And the S&P performed similarly, growing 17 percent in the same seven-month period; all major indexes hit all-time highs in recent weeks.
So now the economic indicators for 2019 are mostly in, and the reports are very good. While not as strong as 2018, it is a long way from a recession. Remember, tail winds can push hard, and a strong job market with our 3.5 percent unemployment rate at a 50-year low, very steady GDP growth at 2.3 percent last year, and the aforementioned record stock market all blow hard at our economic backs, making it difficult to slow our economy.
So when does it come to an end? Recession feels inevitable. Tides come in and tides go out. The sun rises and the sun sets. The economy expands for a decade or so and then contracts. But a look at Australia and the amazing management of their economy is a good indicator of what a well-managed central bank can do for a developed economy. Australia is now in their 29th year of an expanding economy with no recession, and is now the longest in modern history, leading economists to brand it the Wonder Down Under.
While some of Australia’s economic growth is partially a stroke of luck, with a location near the burgeoning economies of the Asia-Pacific, as well as its wealth of mineral deposits, it is also due to sound and deliberate government policy which holds lessons for other countries around the world.
What are some of their secrets? First, learn to fight a recession the right way. Australian policy makers combated the 2008 global financial crisis more adeptly than their peers in the United States and Europe, implementing fiscal stimulus quickly and not turning to budget austerity as the economy recovered. As a result, Australia’s growth rate dropped without the economy actually shrinking.
Just months out from the recession, congressional Republicans started pushing budget cuts. European governments started slashing spending too, requiring strict austerity in the continent’s debt-laden peripheral economies. Australia, however, showered money on lower-income households, and spent heavily on infrastructure. What’s more, they had an easier recession to combat because the country avoided the subprime-lending boom, so its financial institutions were not heavily invested in exotic mortgage instruments.
Another policy that has reaped huge rewards: a welcome immigration policy. More than a quarter of Australians were born abroad, double the rate of the United States or France, and in recent years, the country’s population has grown at twice the rate of the U.S. Given that Australia’s immigrants tend to be younger than its native-born population, those numbers have helped improve the country’s fiscal outlook, bolstered its government coffers, expanded its working-age population, and lowered its median age. The economic math is not complicated: more people means more investment and consumption, which means less chance of a downturn.
None of this says the country has somehow managed to fix the business cycle entirely. But it does demonstrate that smart governance is largely determinative of a country’s growth path, with recessions often a product of human frailty, not fate. Whenever America’s next recession strikes—whether next year or three or 10 years from now—there likely would have been a way to lessen or prevent it, and there likely will be a best way to fight it. As a good start, perhaps, Washington should consider borrowing some bureaucrats from Down Under.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter – @allenvillere.