Euro crisis will affect Australia: RBA
The Australian economy will inevitably suffer spillover effects from the European government debt crisis, the Reserve Bank of Australia (RBA) says.
THE Australian economy will inevitably suffer spillover effects from the European government debt crisis, the Reserve Bank of Australia (RBA) says.
However, Australia is well placed to withstand the impact of the European crisis on the global economy as it has few direct trade links to Europe, strong government finances, and a resilient banking system, RBA deputy governor Ric Battellino also says.
He said it was possible eurozone nations would be able to resolve the worsening crisis, otherwise the continent could face dire economic consequences in the next year.
“Other outcomes, including deflation caused by prolonged fiscal austerity, inflation caused by large-scale debt monetisation, or some disruptive event such as a change in the composition of the euro area, cannot be ruled out at this stage,” he told a finance and banking conference in Sydney on Wednesday.
Mr Battellino said Australian banks had very little exposure to European sovereign debt, with government bonds from the nations most at risk of a default: Greece, Ireland, Italy, Portugal and Spain, accounting for only 0.2 per cent of Australian bank assets.
Australia also had limited trade exposure to Europe, with just four per cent of merchandise exports going to eurozone countries.
Furthermore, if global conditions worsened it was likely that the Australian dollar would fall from its present high, providing a cushion for the domestic economy.
But Australia would not be completely shielded from a downturn, particularly if the debt crisis resulted in higher borrowing costs for Australian banks and a slowdown in Asian economies, including China and India, both of which had strong trade links to Europe.
“The large size of the euro-area economy and the significant role played by European banks in global cross-border banking mean that it is inevitable that there will be spillovers to other parts of the global economy, including Australia,” Mr Battellino said.
Mr Battellino also said that a slower pace for Asia’s booming economies might not be bad news for Australia in the longer run.
He said the rapid growth experienced by China and other Asian nations was not sustainable.
“In some ways I think it is better for us in the long run that growth in Asia subsides to a more sustainable pace, and I think that is what we are seeing at the moment,” he said.
Mr Battellino said Australian consumers appeared to have reached a new equilibrium following the global financial crisis.
Saving levels, which rose significantly following the crisis, had been largely steady for the past year but consumers were now spending less on goods and more on services.
“It has been quite an uncomfortable period for a lot of business I understand that.
“But broadly speaking, household spending is roughly normal at the moment and that is a reasonably position to be in.” - AAP