Australia’s two economies
We might well be confused. A fortnight ago, the Bureau of Statistics (ABS) reported that Australia added a phenomenal 312,000 jobs in 2015, most of them full-time. The next day, respected economic forecaster Stephen Anthony warned there is a more than 30 per cent chance that this year we will go into recession.
It’s possible they might both be right. Or they might both be wrong.
We don’t know what will happen in 2016. Most likely, the urban economies of Sydney, Melbourne and other Australian cities will keep growing and putting on jobs, even if pay rises remain skinny. The growth in housing construction has probably peaked, but on most counts, the Australian domestic economy looks pretty good right now.
But what worries Anthony, the chief economist for Industry Super Australia, are the possibilities that China’s economy will hit the wall, or that the world will suffer another financial crisis. No country is more dependent than Australia on exports to China. And the impact of any global crash would quickly ricochet here, flattening the mining sector and other exports that have kept us out of recession so far.
So it’s possible we could see the economy theoretically in recession – that is, our total output or gross domestic product shrinking – while the mainstream of the economy in the cities is doing fine.
Perhaps the real issue is: do we still have an “Australian economy”? Or do we now have two separate economies that are fated to travel in opposite directions – an urban economy that most of us live in, and a capital-intensive, remote mining economy?
In the past, good times for one industry usually meant good times for others. When wool or wheat prices rose, farmers used the windfall to build new sheds, replace fences, buy a new tractor, or take a holiday at the beach. That way, their good fortune was passed around to the rest of us.
We got used to economic expansions that enabled the Australian and global economies to sail ahead effortlessly. We lived in a virtuous circle. There were more of us each year, and our demand for new things grew, so we spent more. That meant employers kept hiring more people to meet the growing demand, and paid us higher wages. That meant we had more workers, with higher incomes, so their demands for new things grew, and they spent more, and so on. We’ve got used to that economy over the long boom since the recession of 1990-91.
But that’s not what’s happening now, or what’s been happening over the past decade. It’s been dominated in turn by the first mining boom of 2005-08, then the global financial crisis, then the second mining boom of 2010-12 – and since 2012, by that boom deflating, more rapidly each month, as existing projects are completed, the prices of minerals sink lower and future resource projects are shelved.
Yet the story for most of the economy has been quite the reverse. Things have fallen out of sync. Both mining booms were driven by tectonic shifts in the prices of Australia’s key mineral exports, iron ore and coal: they soared as Chinese demand swelled, then deflated as rising global supply ran into falling Chinese demand. And as those prices rose and fell, so did the value of the Australian dollar.
Over the 20 years from 1985 to 2005, the dollar fluctuated between 50 US cents and 90 US cents; its long-term average was 70 US cents. But the second mining boom pushed it up to hang around $US1 or higher for three years. For businesses that competed on global markets – whether by exporting to other countries, or by competing with imports here – the market had massively increased their prices while massively lowering those of their competitors.
That hurt manufacturers, destroying the last survivors of what was once a thriving Australian car industry. It hurt tourism operators, especially in Queensland: the number of Australians travelling overseas doubled in six years, while the number of overseas tourists holidaying in Australia plunged 13 per cent. Farmers and the education sector were also hit directly. Firms in every area found it more profitable to buy goods and services from overseas they had previously bought at home or produced themselves.
And while the high dollar was temporary, some decisions made as a result – allowing the Australian car industry to collapse, for instance – were permanent. The Reserve Bank often intervened in the markets when it believed the dollar was too low. Its refusal to intervene between 2010 and 2013 when the dollar went too high led to permanent reductions in Australia’s productive capacity, above all in manufacturing.
Mineral prices peaked in mid-2011, as new supplies caught up with the surge in global demand. The phenomenal growth in construction of new mines in the outback and gasfields in the ocean peaked in mid-2012. The Australian dollar, as the Reserve Bank measures it, peaked in early 2013. The mining boom has turned to bust, and the whole process has gone into reverse.
Since then, the Australian dollar has stabilised at about 70 US cents, back to its long-term average. But prices for iron ore and coal have fallen to as little as a quarter of their peak levels. Many mining investments made in the boom are now unprofitable, not for BHP and Rio, but for smaller companies, and for thousands of mines in China and the rest of the world.
Stephen Anthony notes that mining investment has shrunk from almost 8 per cent of Australia’s GDP in 2012, to 5 to 6 per cent in 2015, and will shrink further to its average rate of 1 or 2 per cent by 2018. “What’s going to take up the slack?” he asks. “Non-mining investment has been declining. Export volumes are doing okay, but they’re at risk if China slows further.
“The lower dollar has increased tourism and education exports, but not that much, and we’ve hired out our manufacturing. And while conditions in Australia are relatively benign now, we are in the middle of an income recession. Incomes have been falling for two years, and most people are doing it fairly tough.”
Some would dispute that. Even if the ABS’s estimate of 312,000 new jobs in 2015 overstates the reality, the rapid growth in job ads online and job vacancies confirm that a lot of new jobs are being created. Those jobs add to household incomes, and while wage rises have never been lower, the plunge in petrol prices means wages are still outpacing prices. The weekly wage is buying us more.
Yet the national accounts support Anthony’s case. In the year to September, on the trend figures the ABS urges us to use, the economy’s output grew 2.3 per cent, or 0.9 per cent per capita. But when you factor in the sharp fall in returns on our exports, the ABS’s best measure of Australian living standards, real net disposable income per head, fell 2.7 per cent over the year to September. On that basis, we’ve each taken a 5.6 per cent pay cut since it peaked in December 2011.
But in reality, that tells me that there is no one Australian economy. Yes, mining companies are being paid less now for what they sell, and mining investment has gone into freefall; but unless you work in or for the industry, or you’re a big shareholder, your income does not go down when mining goes down, no more than your income went up when mining went up. Mining is a bit of an island, or at best a peninsula, in the Australian economy, only partly connected to the rest of it.
And in the rest of the economy, things are mostly looking good. Jobs are surging, housing is at record levels, governments have big plans for new infrastructure. Against that, business investment remains weak, and the federal government has a big deficit problem, for which its only solution is to transfer it to the states via cuts in hospital and school funding.
My guess for 2016 is that Australia will again muddle through. That’s also what Stephen Anthony is tipping, but if there is a collapse in China or another global financial shock, he wants governments to be ready to roll out economically viable infrastructure projects to provide stimulus, and reshape tax breaks for investments, including negative gearing, so they reward us for creating new assets rather than merely buying existing ones.
China is the biggest risk. Its demand over the past 15 years has been driven by the biggest speculative real estate boom the world has seen. Its finance sector has grown suddenly from minnow to whale, with lending based on connections rather than merit, and the country’s total debts now exceed that of the United States. The risks of a collapse in China are real, and if it happens, then this will become a very different place.
This article was first published in the print edition of The Saturday Paper on Jan 30, 2016 as "Twin fortunes". Subscribe here.