SYDNEY — One Saturday in March, in the suburbs north of Sydney, around three dozen people gathered on a lawn outside a smallish two-bedroom apartment.
They were taking part in an idiosyncrasy of the Australian economic system. Here, selling a home tends to be an almost festive gathering, in which potential buyers show up for an auction and neighbors stop by to watch the spectacle — and quietly calibrate how much their own homes might be worth.
On this muggy day, almost all of the assembled crowd turned out to be gawkers; only four people actually raised their bidding paddles at any point. After bidding opened at 750,000 Australian dollars (about $532,000 in the U.S.), the action started slowly. Twice, it seemed to be petering out as the auctioneer, Andrew Robinson, nearly banged his final gavel, only to be extended with one more bid. Finally a young couple whose agent lobbed in a 930,000 Australian dollar ($661,000) offer won the day.
It reflected a wheezing Australian housing market. Prices have fallen since the country’s banks tightened lending standards in mid-2018 and the Chinese government made it harder for its citizens to buy property abroad. Not too long ago, the number of interested parties might have been double.
“Twelve to 18 months ago, it would have sold for 1.1 million,” said Mr. Robinson, with Belle Property, as he packed up his gavel and papers and prepared to head to his next auction on a day he would conduct eight of them. “There was more of a frenzied atmosphere, more people bidding who just didn’t want to lose out.”
I had flown 16,000 miles not to study economic malaise, but its opposite: the remarkable resilience of the Australian economy, which has gone nearly 28 years without a recession. The government, with elections to take place next month, recently announced an expected surplus in the next budget year.
Surely this grand economic success story would hold lessons for the United States and the rest of the world, right?
Yet instead of giddy enthusiasm, what I found in Sydney was a pervasive sense of caution and wariness — and not just involving real estate, though housing does loom large in discussions about the economy. In conversations with Australian businesspeople and college students, economists and government officials, I detected no sense of triumphalism.
An entire generation of young adults has grown up without experiencing a protracted downturn. But in Australia, as I came to learn, nobody really acts as if they’re the stars of an unprecedented three-decade success story. They’re aware that the good times could end. The mood is more practicality than pessimism.
America is on the verge of its own economic milestone: The current expansion is on track to reach its 10th birthday this summer, which would also put it on record as the nation’s longest streak without a recession.
During the decade I’ve spent chronicling that growth as an economics writer, a persistent whisper has been: How long can it go? The run has been uneven, underwhelming and repeatedly on the verge of unraveling, including scary moments in 2010, 2015 and this past December. Seemingly every commentator without a good cliché blocker has referred to it as “long in the tooth.”
Even the language of economics suggests that an end to the good times is inevitable. If you’re going to call it the “business cycle,” things can’t just keep getting better forever. Some of history’s great economic thinkers have theorized that downturns are as essential to the workings of the economy as the seasons are to agriculture.
Is Australia a unique case, a beneficiary of some good economic luck that cannot be replicated in the rest of the world? Or is the nation onto something, and are there lessons in economic policy that are applicable everywhere?
When I landed there in mid-March, in the waning days of the Australian summer, that’s what I hoped to figure out.
Good luck and good policy
Ask Australian economists about this golden run, and almost all will say it has been driven partly by good luck and partly by good policy.
The luck part can’t be minimized. Beneath the ground of large stretches of Australia are the iron ore and coal that have been the raw materials behind China’s long economic boom. Above ground lies the wheat and cattle that have helped feed China’s rapidly growing middle-class population.
China’s growth, in other words, has created a tailwind that has boosted Australia’s economy for much of this period. And if the Chinese economy ever truly tanks, even the most skilled policymakers in Australian will have a hard time preventing a recession.
But China’s gravitational pull can explain only so much. For one thing, other countries nearby have had recessions, some severe, in recent decades. And there are a long list of policy choices that enabled the long Australian boom even as otherwise similar economies sank.
One episode is particularly telling. In 1997, an East Asian financial crisis walloped the economies of countries like South Korea, Thailand and Indonesia. These nations were major buyers of Australian exports. The value of the Australian dollar started to fall on global currency markets, putting the expansion at risk only six years in.
On the other side of the Tasman Sea, New Zealand’s central bank responded to the same problem by raising interest rates. After all, a falling New Zealand dollar indicated a lack of confidence in the currency and implied that inflation would soon rise.
At the Reserve Bank of Australia, by contrast, officials concluded that the falling value of the Australian dollar reflected shifting economic fundamentals that were ultimately healthy — part of how the Australian economy could adapt to faltering demand from East Asia.
Rather than raise interest rates to try to prevent a falling currency, they viewed a falling currency as the key to navigating the peril — by making Australian exports more competitive in the United States and Europe, for example.
“The government was uncomfortable if the exchange rate went too low, because it looked like a sign of no confidence,” said Malcolm Edey, who was the central bank’s head of economic research at the time. “We had a good monetary framework in place, we stuck to it, and we didn’t panic when the exchange rate moved around along the way.”
Sure enough, New Zealand fell into recession in 1997 and 1998, while Australia endured only a period of subpar growth. Good policy, it turns out, has a way of creating good luck. And it wasn’t the only time.
Boring banking and avoiding the global financial crisis
If you had looked around the world circa 2006, you would have seen a number of countries where housing prices had soared into potential bubble territory, including the United States, Britain and Australia.
But two years later, while the United States and Britain were in a severe recession and financial crisis, Australia experienced only a single quarter of contraction. Why the difference?
The answer seems to be how the financial industries of those countries were structured and regulated. To understand that better, I sought out a tutor, one who turned out to have an unlikely background: David Morgan, a former child actor and professional Australian Rules Football player who later became one of the country’s leading bankers.
After a wave of deregulation in the 1980s, Australian banks took on ever-more-risky lending, especially for commercial real estate, and got into new business lines overseas in which they had no obvious competitive advantage. When that asset bubble popped and a recession arrived, the banks came near failure, and there was a wholesale firing of top bank executives.
It was a matter of “going through the furnace, and coming out tempered by experience,” said Mr. Morgan, who was chief executive of Westpac, one of Australia’s major banks, during the crisis. “We were adamant that we would go into the next shock with the least risk and the most resilience, and would not engage in any more offshore frolics.”
The banks — with prodding from regulators — reformulated themselves to take a more conservative and domestically focused approach to lending. After that near-death experience, there remained the “Big Four” banks that together control about 80 percent of deposits; they are not allowed to merge with each other.
The banks also did not engage in the kind of expansionist strategy that had gotten them in trouble in 1991. They did not open huge offices in Hong Kong, London or New York, nor get in the business of creating the complex mortgage securities that were the nexus of the financial crisis.
Good regulation was part of it. “They were good quality regulators; the public sector was getting good people,” Mr. Morgan said. Both major political parties have tended to be tough on banks, and there is a single powerful regulator rather than a patchwork of them as in the United States.
But just as important was the sense among bank leaders that they would need to be ready when the next downturn came.
It’s not as if Australia’s banks are perfect actors. A royal commission established to examine the industry found widespread misconduct, including abuses of customers, in a report issued this year.
But they have focused on lending to Australians, especially for home mortgages, and held those loans on their own books. No doubt Australia has missed out on some opportunities by not hosting the big, complicated banks that operate worldwide and do more sophisticated forms of finance. Sydney does not have the concentration of high-paying finance jobs that London and Hong Kong do.
But having a conservative, domestically focused, highly concentrated banking system meant that Australia wasn’t stuck importing other countries’ financial contagions when crises hit.
During the global financial crisis, Australia suffered from plummeting demand for its products. But a nicely designed fiscal stimulus — combined with a falling Australian dollar and an assist from aggressive stimulus by China — helped the country regain its footing rapidly and avoid the mass economic pain found in so much of the world.
The pessimism of 2019
If there’s anyone you would expect to be bullish, it might be the young adults entering the work force, who have never lived through a recession. But among them — as with other Australians who don’t occupy the halls of government or financial power — you find angst and uncertainty rather than boom-time optimism.
“I think there will be a recession within the next 10 years,” said George Ye, 25, who is studying for a master’s degree in data science at the University of Sydney. “I feel like sentiment is, we might have gotten to a peak. Things have gone so well for so long that the things we need to buy are getting more and more expensive,” especially housing. “I think the generation of people born 10 years prior to me are much more confident than I am.”
“I’m pessimistic,” said Freya Zemek, 24, an employee at the university. “I think we’re probably looking at a recession in 2020. Consumer confidence isn’t very high. The signs aren’t looking great, and I think it’s the sort of tightrope situation where we could be next for a recession. It’s only a matter of time. Nothing goes on forever.”
Housing especially seems to be in the opposite of a sweet spot. It’s still too expensive, especially in booming Sydney and Melbourne, for young people. Yet the prices are well below those from a couple of years ago, leaving recent buyers sitting on paper losses.
But just maybe, the contrast between a pessimistic mood and a long record of economic success isn’t as contradictory as it may seem.
Are recessions really necessary?
In November 1990, the Australian treasurer (and later prime minister) Paul Keating described a painful downturn then underway as “the recession we had to have.”
His point was that excesses in a lending and credit boom, combined with high inflation, meant that the Australian economy needed the wrenching experience of a downturn to rid itself of those excesses. It was also a horrible political gaffe, a comment that went over poorly in a country then burdened with an 11 percent unemployment rate.
But the question of whether he was right is profound — one that economists can still debate.
The great economic thinker Joseph Schumpeter argued that recessions served an essential purging mechanism enabling a society to become richer over time. Through business failures, capital is redeployed to emerging high-growth industries. In this thinking, recessions play a cleansing effect, clearing the way for the future.
Hyman Minsky, another 20th-century economist, argued that long periods of financial stability could breed complacency: The longer a nation goes without a downturn, the more risky behavior will build up in the economy, making the eventual downturn worse.
Those theories sound plausible. Data to support the case is a little harder to find. In fact, there is some evidence that recessions actually cause lasting damage to a country’s economic potential — that they hurt, rather than help — by thrusting people out of the work force unnecessarily and causing their skills to atrophy. Research shows that people who enter the work force during a recession take a hit to their earnings even decades later.
There have also been long periods when the Minskyite story has seemed not to apply, notably in the decades after World War II in the United States.
“I think Australia’s experience shows that you don’t need recessions to clean out the system, but it does show that what you need is strong, clear policy settings from governments,” said James Pearson, the chief executive of the Australian Chamber of Commerce and Industry. “There is a risk, and I think we’re seeing it in Australia today, that a prolonged period of economic growth without recession can lead to complacency both among policymakers and the electorate.”
But that brings us back to the slowing housing market, and the general sense of pessimism that sneaks into conversations about the economy in Australia, especially among the young.
Maybe the real reason Australia has made it so long without a downturn is an absence of complacency. No one is brimming with overconfidence that all is well and always will be.
“What has happened in the last 27 years is a series of shocks, each of which, thanks to policy and luck, we were able to overcome,” said Stephen Grenville, the former deputy governor of the Reserve Bank of Australia and now a fellow at the Lowy Institute. “That’s the nature of the economy we’re in now — an economy with shocks plus flexibility.”
It isn’t the absence of bad stuff happening in the economy that has kept Australia growing for so long. It is the nation’s economic flexibility and policymakers’ rejection of complacency.
So maybe the pessimism isn’t a paradox at all. And maybe we would be more worried about Australia’s economic future if house prices had kept soaring toward unsustainable highs, or if young people had made economic decisions with a sense of reckless invincibility and engaged in borrowing and spending behaviors accordingly.
The Australian experience is evidence that the “business cycle” is a misleading way to think about economic growth. Recessions aren’t like thunderstorms, an inevitable, random event that may be violent but provide much-needed water to crops.
Maybe recessions are more like car crashes. They may never be completely eliminated, but making the right choices can make them rarer and less damaging when they do happen.
In trying to learn the lessons of Australia, that may be the biggest of them all. There will always be bad things that happen in an economy. The best way to keep them from causing the mass pain that accompanies a recession is to combine sound policy, a flexible and dynamic economy and — perhaps most important — just the right amount of fear.