Can Australia’s Winning Streak Continue?

Australia Stock Returns

The past two decades have been tough for most international developed economies. Japan has experienced mediocre economic growth for the past 25 years. Europe has recently suffered through two recessions as it battled the global financial crisis and then a sovereign debt crisis. Australia, by contrast, has been a star of the global economy: it hasn’t had a recession since the early 1990’s. Its stellar economic performance is a key reason why its stock market has returned an average of 12.4% per year over the past 10 years, compared with 6.8% for international developed markets overall. Can its winning streak continue?

There are two common explanations for Australia’s success. One is that Australia’s central bank, the Reserve Bank of Australia (RBA), has done a masterful job of managing the country’s economy. The other is that Australia simply piggybacked on the booming economic growth of China, its largest trading partner.

If Australia’s success was just a side effect of China’s economic surge, that may not bode well for Australia’s future prospects. China’s growth rate has slowed from over 10% a year for much of the previous decade to less than 8%, and it may fall further as the Chinese government seeks to rebalance the country’s economy.

If the cause was instead the RBA’s adroit central banking, perhaps the outlook for Australia’s economy is sunnier. In theory the central bank could manage the fallout from a slowdown in China’s growth, though there’s certainly no guarantee that successful economic management in the past will mean successful economic management in the future.

There’s probably some truth in both explanations for Australia’s success, though the RBA’s job is likely to be more difficult than it was in the past. Its benchmark interest rate is at a record low level, giving it less room to further reduce interest rates in order to boost the economy. If China’s economy continues to slow, Australia will struggle to keep its economic winning streak alive.