Comparing the 2008 GFC to Today's Economic Pressures
The Australian economy has been hit by two major global economic cycles since 2008, the Global Financial Crisis (‘GFC’) and the COVID-19 pandemic (‘COVID’).
While the GFC was triggered by a financial crisis in the United States, the current economic pressures stem from the pandemic in addition to geopolitical tensions.
The GFC was a catastrophic event that had significant impacts on the world economy. It was primarily caused by predatory mortgage lending in the subprime market, driven by market greed. This was further worsened by fraudulently rated AAA collateralised debt obligations and mortgaged backed securities, which were backed by subprime "toxic" assets. The crisis was exacerbated by excessive spending, high interest rates, and overextension by both individuals and businesses, leading to unsustainable levels of debt and the collapse of house prices. Ultimately, these factors culminated in the collapse of the Stock Market and global economy in 2008.
Fortunately, regulatory changes have since been implemented to address these issues and prevent similar crises from occurring in the future. However, despite these efforts, the Australian economy has still been hit hard by a series of external economic shocks over the past two and a half years, which could still develop into a full-scale recession.
During the GFC, governments across the world were faced with the challenge of mitigating the macroeconomic impact, prompting the implementation of significant fiscal stimulus packages aimed at countering the economic downturn by stimulating demand and boosting employment. In line with this approach, the Australian government, under the leadership of the Rudd administration, lowered the cash rate by 100 basis points, which peaked at 7.25%, introduced guarantees for Australian bank deposits and wholesale funding. An allocation of substantial sums towards multi-billion-dollar stimulus packages, job creation schemes, and expedited infrastructure projects were also implemented. Despite these measures, the Australian Dollar experienced a significant decline in value.
The COVID pandemic has also had a significant impact on the global economy, which has been further compounded by Russia's invasion of Ukraine. This has led to increased instability, making it challenging for businesses to operate and individuals to maintain their financial stability. Governments are now faced with the task of addressing both macro and microeconomic concerns in order to stabilize their economies.
These current economic challenges have prompted a series of monetary measures, including twelve interest rate increases by the Reserve Bank of Australia (‘RBA’), bringing the rate to 4.10%, denoting a graphical inverse relationship, when compared to that of the GFC. In addition, there have been targeted fiscal interventions such as a rise in the minimum wage. Despite these efforts, inflation has remained high, currently at nearly 6% compared to a peak of 5% during the COVID pandemic. This persistent inflationary environment is a source of concern for both policymakers and households.
The present predicament has been compounded by the prior quantitative easing initiative of the RBA, which involved a substantial injection of cash into the economy and an erroneous commitment to households that interest rates would remain unchanged until 2024.
Additionally, the media and stakeholders in the housing market have fostered a culture of increased borrowing and spending among households to sustain the high demand and prices in the housing market.
The COVID lockdowns and closure of international borders initially caused a surge in unemployment and underemployment. As the borders opened and the Australian economy rebounded, a labour shortage ensued. Presently, unemployment stands at 3.5% and underemployment at 6.1%. These figures demonstrate a level of employment strength not seen in generations. It is notable, however, that this impact differs from that of the GFC, which resulted in significant job losses and an increase in unemployment rates.
In light of recent trends, it is projected that net-overseas migration to Australia will reach 650,000 over the two financial years (2022-23 and 2023-24). This increase in migration could potentially exacerbate inflationary pressures within the Australian economy, affecting both the labour and housing markets. Particularly, the rental housing market is already under significant strain, with escalating demand leading to a surge in rental prices, thereby aggravating the existing inflation issue.
The current global situation has brought about considerable disruptions to the supply chain in Australia, particularly affecting the retail and manufacturing sectors. This has resulted in an overall increase in prices across all sectors. The construction industry has also been significantly impacted, as the elevated costs of materials have led to increased expenses in building developments. The ongoing conflict between Russia and Ukraine has further intensified the issue, resulting in a significant rise in petrol prices of over 50%. Furthermore, the import of fertilizers has surged by a third, leading to an increase in the cost of food production. These challenges have created a difficult business environment, with a notable impact on the overall economy and households facing a cost-of-living crisis.
Australia's economy has demonstrated remarkable strength and resilience over the years, maintaining uninterrupted growth for more than two decades. While these favourable conditions will provide some degree of protection against the current storm, the impact is still being felt.
It is imperative to recognize that the economic challenges currently facing Australia are separate and distinct from the 2008 Global Financial Crisis. It is essential for the federal government and RBA to have a comprehensive understanding of the differences in their origin, impact, and responses. Despite the implementation of a range of fiscal and monetary measures by the government to mitigate the economic downturn, potential future global events such as pandemics and geopolitical tensions may continue to place pressure on the Australian economy. By drawing lessons from past experiences and adapting accordingly, Australia can develop robust strategies to overcome the unique economic challenges that lie ahead.