Until the September Quarter 2008, the Australian economy had experienced an extended period of expansion from the early 1990s with new lease and other equipment finance volumes strong. Since 2002, the rise in commodity prices increased Australia’s terms of trade by some 70%. However, as substantial domestic supply constraints emerged and the inflation rate rose above the Reserve Bank’s target of 2-3%, from late 2001 official interest rates increased 13 times over the 7 years from a low of 4.25% to 7.25% in August 2008.

However, with negligible GDP growth in the September Quarter coinciding with a series of global financial crises and dislocated funding markets, monetary policy has been rapidly eased such that the official rate has been reduced 4 times in 4 months to 4.25% in late December.

Fiscal policy has also been significantly eased with a $10.4 billion consumption stimulus implemented in early December and a 10% Investment Allowance introduced for expenditure on plant and equipment over $10,000 contracted for before 30 June 2009.

These major positive domestic policy responses have however to be weighed against the local impacts of unprecedented disruptions to global financial markets and the international economic slowdown. Despite a continuing sound and profitable banking and finance sector, Australia has not avoided the effects of the collapse in counter-party confidence which has seen liquidity and funds availability dry up for all but a restricted set of government guaranteed institutions. Compounding this has been the withdrawal from the local market of several major global financial players and the repatriation or rationing of available capital and credit for others that remain. While motor vehicle finance has been particularly hard hit, the funding constraint has applied across the board. As a consequence Australian businesses are currently contending with a reduced demand for their products and a reduced supply of finance for their operations.

Against this backdrop, the outlook for the Australian economy, capital investment and equipment financing remains uncertain, although the starting points of sound prudential regulation, Government Budget surplus and firm interest rates, give some optimism that fiscal and monetary policies can continue to be applied to minimise any economic slowdown. Unfortunately however, the global nature of the financial crisis, now into its second year, makes it very difficult for the domestic economy to remain unscathed.