Bloomberg: Australia should prepare for worse

By Leith van Onselen

While local economic commentators see Australia having “the perfect economy”, many offshore commentators, most notably Michael Pettis, see an economy that has become increasing undiversified and far too dependent on the mining sector and China to drive employment and growth.

This outsider’s view is encapsulated nicely by Bloomberg’s Asia Pacific correspondent, William Pesek, who has today posted an interesting article questioning the sustainability of the Australian economic story and wondering whether we are being set up for failure as the commodity boom inevitably fades. Let’s take a look:

[Gillard’s] almost three-year-old government has played by the rules: It has kept the national budget in, or close to, surplus, has conducted monetary policy credibly and has done more than others to tax the carbon emissions heating up our planet. And what thanks has Australia gotten for heeding the gospels the West once preached so piously? An overvalued Australian dollar that is hollowing out the country’s export industries…

Australia’s currency has soared 75 percent against the U.S. dollar and 89 percent versus the yen since the 2008 collapse of Lehman Brothers Holdings Inc. precipitated a global financial crisis. When I asked government officials and business leaders in Sydney last week why they were so glum about the future, three words kept coming up: the strong dollar.

Even so, it’s time for Australian leaders to stop complaining about the unfairness of the situation and start addressing the real weaknesses in their underlying economy. For years now, theirs has been, as the title of Donald Horne’s 1964 book had it, a “lucky country.” Arguably, no developed economy has benefited more from the reforms unleashed in China by Deng Xiaoping in the late 1970s. The Chinese boom has led to soaring demand for Australia’s natural resources, such as iron ore, coal and copper.

Indeed we are the Lucky Country. As shown below, Australia’s four major exports – iron ore (25% share), coal (15% share), gold (7% share) and natural gas (6% share) – have risen five-fold since late 2003 on the back of the China story.

ScreenHunter_01 Apr. 17 09.17

The sharp rise in the value of Australia’s export commodities since 2003 essentially meant that Australia received a pay rise, since more imports could be bought with a given volume of exports. In turn, real (inflation-adjusted) average personal disposable incomes increased at a much faster rate than justified by the growth of the Australian economy, as measured by real per capita GDP (see next chart).

ScreenHunter_02 Apr. 17 09.25

The sharp rise in commodity prices has also underpinned government budgets, which have reaped the benefit of rising personal and company taxes, as well as resource rent taxes. Some of this extra taxation revenue has been re-distributed to households via tax cuts and welfare payments, thereby further inflating disposable incomes.

Anyway, back to the Bloomberg article.

As a result, rapid growth has come almost too easily. Australia has benefited from skilled treasurers… Yet they have only really had to manage good times. Meanwhile, elected officials have focused their energies on keeping the commodities boom going. Mining takes up a disproportionate amount of the government’s attention, for instance, even though it employs just 2.5 percent of the working population.

I’ll leave others to critique the view that Australia has had skilled treasurers. My bigger issue is the author’s claim that mining employs just 2.5% of the population. This is untrue. Research released in February by the Reserve Bank of Australia (RBA) estimated that the resource economy accounted for nearly 10% of total employment in Australia and 18% of gross value-added in 2011-12, with strong growth experienced since the mid-2000s.

Back to the article.

Politicians forget that Horne meant the title of his book sardonically. “Australia is a lucky country,” he wrote, “run by second-rate people who share its luck.” Instead of using the strong dollar as an excuse to wean themselves off China, politicians in Canberra and corporate executives from Sydney to Perth are urging the central bank to come to their rescue. Gillard and others are essentially abdicating their responsibilities to Glenn Stevens, the Reserve Bank of Australia governor…

Australian leaders should instead be using this time to prepare the country for the day when Chinese demand inevitably begins to dry up. The government should be taking advantage of the lowest benchmark rates in 53 years to borrow and invest. Funds are required to rebuild crumbling infrastructure and upgrade the education system, to encourage a shift to higher value-added manufacturing and to promote innovation.

Australian industry, too, must find ways to remake itself: ways to compete, create jobs, increase productivity and address the risks posed by climate change. At a time when the strong dollar is “decimating” exports, says Terry Davis, group managing director at Coca-Cola Amatil Ltd., “the only answer is better research and development.” As Swiss and German companies have, Australian firms must seek out value-adding niche industries that are more reliant on human capital.

Australian firms also should use the brawny dollar to start acquiring companies overseas. Nothing buys financial influence these days like a stable of multinational giants. If the Chinese can use their strengthening currency to acquire corporate gems, why can’t the Australians? Executives should zero in on the technology, science, finance and transport names they fancy and go after them.

Few doubt that Australia has great economic managers. But the Chinese boom has made the job far too easy. What the country needs now is for its leaders to start leading. Otherwise Gillard may find herself adding to that unemployment number in a few months.

Too right. I agree with the author’s general thrust that Australia has rested on its laurels and become increasingly lazy over the past 10 years of the mining boom. The rot set in under the Howard Government’s regular pork barrelling and lack of reform, which squandered the proceeds of the boom and failed to set Australia up for a future beyond turbo charged mining. And the rot has continued under the current government and opposition who, together, have acted like school children, preferring political point scoring and gimmicks instead of genuine policy making and debate.

As a result, the Australian economy now finds itself in a precarious position, whereby any protracted downturn in commodity prices, brought about by the slowing Chinese economy and/or an increase in global commodity supplies, would likely hammer incomes, jobs and government revenues as the terms-of-trade deteriorates and planned mining investments are cancelled, with little else now available to fill the void.

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  1. “Few doubt that Australia has great economic managers.”

    I reckon I could round up one or two of that few…

  2. Good summary and correct conclusions too.

    This bit needs editting though;

    ” It has kept the national budget in, or close to, surplus,”. Let’s keep it real.

      • The numbers and percentages there don’t matter diddly squat. We already have massive private debt. Howard’s surpluses were to a large extent built on that expanding private debt.
        You have to combine both private and public debt to assess the reality of where we are at. The current wind-up in public debt has no apparent end and looks to be destined to get worse as far as we can see.
        Thye only solutions being proffered are more public debt by the Left and more private debt by the right.

        • Private debt is high, so what? People in the private sector can always default.

          Governments don’t have the default option in reality without the financial system taking losses.

          • Capitalist,
            Yes, in individual cases, people in the private sector can default. But only if you’re not regarded as systemically important or too big to fail, such as pretty much all of Australia’s banks (not just the big 4), in which case the government won’t let you default. Therefore, all private debt can ultimately be assumed to be contingent public liabilities. Taking it even higher still is not prudent risk management since we, the taxpayers, will ultimately foot the bill.

      • LOL, the old OECD comparison. I wonder when that furfy will ever get tired with the Lefts big spenders.

        Yes, let’s have LOT’s more debt and Public expenditure and join the OECD in it’s economic socialist nirvana. After all there is no problem, we can always print more to pay it off. Chartalists never saw a debt they couldn’t print their way out of.

    • I think that was a comparison to European and US deficit levels. But yes, it’s a good point and Australia should have done much better with the good fortune it’s had. There is no good excuse.

  3. “Australia should prepare for worse”. It has! Look about you. That’s what’s called preparation…..

  4. UE & Pesek both grossly underestimate the trouble we are in and the gross incompetence that has brought us to this ‘pretty pass’.

    We didn’t just rest on our laurels re our income, we took on a whole lot of debt and flogged off the family silver and a few paddocks to go with it.
    Further the problems didn’t start with Howard. They go back to the 1950’s.

    John Leard, at Hawke’s Economic Summit in April 1983 spelled out very accurately where Aus was at and where it was headed. His warnings are now all too apparently accurate. He was roundly ignored by Hawke, Keating, Wran et al and everyone ever since.

    There is no way out. The answer lies back in time.

    • “…..There is no way out. The answer lies back in time……”

      Of all sad words of tongue or pen, the saddest are these: “what might have been”.

      – John Greenleaf Whittier

  5. “The sharp rise in the value of Australia’s export commodities since 2003 essentially meant that Australia received a pay rise, since more imports could be bought with a given volume of exports. In turn, real (inflation-adjusted) average personal disposable incomes increased at a much faster rate than justified by the growth of the Australian economy, as measured by real per capita GDP.”

    Hooray! Someone has finally printed what I always thought. With all due respect to Australia’s economic performance, when a sparky in Brisbane can literally earn 50% more an hour than one in Auckland something just doesn’t add up…..

    • Failed Baby BoomerMEMBER

      Yup mike, and the Auckland sparky earns 50% more than the sparky in Singapore who earns 50% more than the sparky in Thailand or China.
      Please don’t tell me the Brisbane and Auckland sparkys are worth it because they are so much more productive, safe and skilled.
      I have worked with sparky’s in all these countries and there is not that much difference between them, skill-wise.
      If they are not supervised their safety is all the same.
      The main difference is that the asian sparkies are much more productive and have better work attitudes.

  6. Indeed we are the Lucky Country–lucky to have overpriced housing and high private debt. What could possibly go wrong?