ARTICLE – RECENT DEVELOPMENTS IN FINANCIAL MARKETS
This article was contributed by the Reserve Bank of Australia (February 2012).
Conditions in financial markets have improved since the acute distress in 2008, though financial markets have continued to experience bouts of increased volatility. Global growth since the financial crisis has been largely driven by emerging economies such as China and India, with the recovery of economic activity in advanced economies dependent on accommodative fiscal and monetary policies (RBA, 2010). As a result, public finances have deteriorated substantially in a number of advanced economies, particularly in Europe and the United States of America. With private sector demand slow to recover in most advanced economies, this has contributed to growing market concerns about the sustainability of sovereign finances in a number of these economies, a few of which had started from constrained positions. Sovereign finance concerns initially centred on Greece, Ireland and Portugal, but eventually spread to a wider range of countries in Europe, including the much larger economies of Italy and Spain, and a number of north Atlantic economies have had their credit rating downgraded. Growing concern over whether fiscal policy could address the large and growing level of debt in a number of European economies has resulted in increased risk aversion and volatility in global financial markets, particularly in the second half of 2011.
The effects of financial turbulence since 2008 have been less severe in Australia than in most other advanced economies. The healthy state of the Australian financial system, together with the relatively high share of variable-rate borrowing in Australia, allowed the significant easing of both monetary and fiscal policy in 2008 and 2009 to flow directly through to households, while the rapid depreciation of the exchange rate at the end of 2008 helped to offset falls in external demand. Furthermore, the resilience of Chinese economic activity, and the associated boost in Australian export income, has continued to offset the impact of softer growth in north Atlantic economies.
Nevertheless, the Australian economy has not been immune from overseas economic or financial market developments. The most obvious effect of the financial crisis on Australian households was the fall in net worth throughout the second half of 2008 and early in 2009, which was in large part driven by declines in superannuation and managed funds balances associated with the fall in equity prices over this period. The reduction in wealth is likely to have contributed to a substantial rise in the household savings rate from its pre-crisis level, with solid growth and labour market outcomes allowing this process to occur quite rapidly (graph S27.1). This sharp increase in household savings has coincided with a significant pick-up in term deposits held at Australian deposit-taking institutions. Housing credit has also grown at a more subdued pace, reflecting increased consumer caution in their borrowing behaviour (graph S27.2).