The Australian economy has a 1.80% year-on-year GDP growth rate. The country’s interest rate is 1.50%, and the inflation rate is 1.30%. Australia’s unemployment rate is currently at 5.70% and the Debt/GDP ratio is at a healthy ratio of 36.80%. The latter figure is notable, given that the same ratio in the US is 104.17%, and across the Euro Area it is 90.70%. Japan has a Debt/GDP ratio of 229.20%.
Viewed in perspective, the Australian economy is in good shape, despite a recent downturn in the performance of the AUD. The EUR/AUD pair has a 1-year depreciation of 7.17%, while the AUD/CAD pair is down 1.91% over 1-year. The GBP/AUD pair is down an incredible 18.76%, with further losses for the sterling expected. The AUD has been one of the better performing currencies against the greenback, especially with the DXY surging to 14-year highs.
Why Interest Rates Matter in Investment Decisions
The interest rate in Australia is 1.50% – markedly higher than the interest rate across the Euro Zone, Japan, the United Kingdom, and the United States. This alone presents investors with a lucrative opportunity to generate fixed earnings on capital. The Reserve Bank of Australia has maintained the interest rate at 1.50% since 1 August 2016. While this level is twice the interest rate of the US, it is a record low for Australia. The Australian economy endured an investment boom in the mining industry for many years, but the recent downturn following China’s slowdown prompted a rate cut.
The good news is that the Australian government and the RBA recognize that employment, investment and fiscal expenditure are needed to boost growth. Money flows between Australia and the rest of the world remain strong, and the Australian dollar is a ranking global currency. S&P Global rates Australia as a Triple-A nation, and the country will remain that way provided it delivers on its promises of a surplus by 2020.
How Does Australia Compare with the UK?
The UK economy is in a state of flux. On the outside, manufacturing appears to be sound with a strong uptick towards 56 on the scale, but beneath the surface tensions are rising. Prime Minister Theresa May is expected to invoke Article 50 of the Lisbon Treaty in Q1 2017. The GBP is already one of the worst performing currencies in the G10, and it will likely remain that way with the Brexit issue.
UK investors and Australian investors are already moving money and assets around to prepare for the changes in the UK and across the EU. Once a Brexit is adopted, shockwaves will spread far and wide. The GBP will plunge, and all AUD holdings in the UK will depreciate. For this reason, Australians with assets (liquid assets, fixed assets) are transferring money to Australia from UK accounts. This will continue unabated if uncertainty prevails about the UK economy.
At the height of currency volatility, the GBP/USD pair plummeted from 1.48 to 1.21, hitting a 31-year low. The irony is that Britain had not left the EU yet. Another reason Britons are moving their money out of the UK is the low interest rate at UK banks. The Bank of England reduced interest rates by 25-basis points to just 0.25%. At that rate, there is no point holding hard-earned savings in a UK bank account. Australia offers a stable economy, 1.50% interest rates and many more growth prospects than the UK now.
For these reasons, and many more, the Australian economy is better positioned than the UK economy for growth. In November 2016, the British Bankers Association (BBA) requested an urgent meeting with Prime Minister May. They wanted to ensure that a framework was in place before Britain left the Euro Zone. Such is the concern in the City of London, that many folks are relocating their assets outside of the UK to countries like Australia.