Impact of the Gfc on Australia

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IMPACT OF THE GLOBAL FINANCIAL CRISIS ON THE AUSTRALIAN ECONOMY:

ECON1236 – APPLIED MACROECONOMICS

TYLER GRIBBEN - s3586431

INTRODUCTION:

The collapse of Lehmann Brothers in September of 2008 marked the climax of the global financial crisis. Stock and commodity prices plummeted, credit became scarcely available and consumer confidence declined. Australia felt all of these effects of the crisis, although not to same extent many other countries did. This is due to a strong financial sector and the timely implementation of expansionary fiscal policy. Part 1 of this paper identifies 4 effects from the global financial crisis on the Australian Economy. These effects include the reduced liquidity in debt markets, decline of the Australian Stock Exchange, lowering of consumer confidence, and lowering of exports volumes and prices. Part 2 discusses the actions taken by the then Rudd government in response to these issues.

PART 1 - EFFECTS OF THE GLOBAL FINANCIAL CRISIS WITH A FOCUS ON AUSTRALIA:

The first effect to be analysed in this paper is the effect of the global financial crisis on debt markets. A debt market is a market for the loaning and borrowing of money. The global financial crisis caused a sharp rise in the interest rates banks had to pay in order to continue borrowing money from overseas sources. This brought about a lack of liquidity in financial markets, which resulted in a deficiency of obtainable or reasonably priced credit in numerous countries including Australia (Parliamentary Report, 2009). A lasting effect of the global financial crisis is the reduction of competition within the financial sector. Many small institutions were forced to close or merge with other larger bodies as it became too difficult to raise funds for lending at a competitive rate (Parliamentary Report, 2009). The larger lenders which survived passed on the higher costs of borrowing to consumers, both businesses and individuals, making it harder to afford a loan. Businesses that were reliant on credit began to suffer, causing some to cut jobs or go out of business (Parliamentary Report, 2009).

The second effect on Australia was the decline of the Australian Stock Exchange (ASX) throughout 2008 and 2009 (Makin, 2010). In 2008 the world stock markets lost around 40 percent of their market value, with the Australian market receding by the same margin (Access Economics, 2008). The decline in the ASX had two negative knock on effects on the Australian market, the first was that Australian businesses now had a reduced capability to raise capital through share offerings. This coupled with the inability to access credit placed abundant pressure on many Australian businesses. The second issue with decreased equity values was the decrease in value of superannuation funds (Gittins, 2009). People with equity investments were negatively impacted by a sizeable reduction in the market value of their portfolios (Makin, 2010). This effect is particularly harsh on individuals who were close to retirement and banking on these savings. Individuals impacted by this change in value lost confidence, which in turn leads to lower consumption as they are trying to rebuild their savings.