Aussie economy stuck in rut
Twenty-six years of continual growth hides an unpalatable truth.
Early next year Australians will set a world record of 26 years of continual economic growth. They will displace the Dutch, whose record run ended with the Global Financial Crisis.
But Australians will have little to celebrate when they choose their next government on July 2. Beset by deep structural issues, their economy is stuck in a debilitating rut. Malcolm Turnbull’s Liberal-led coalition and Bill Shorten’s Labor party offer only minor and conventional remedies destined to fail.
Australia’s loss of economic vigour is measured by the World Economic Forum’s Global Competitiveness Rankings. The country fell from 15th in the world in 2008/09 to 21st in 2015/16.
Dutch Disease is causing the pain. Countries catch it when a commodity super-cycle creates a vast boom in one sector. It sucks labour and capital out of other sectors, while artificially inflating growth and the exchange rate, thereby massively damaging other industries.
The Dutch suffered when they discovered vast gas reserves in the North Sea in the 1960s. Australians are suffering now thanks to their mining and energy woes.
The Dutch recovered by using their abundant gas revenues to reorient their economy. Restoring productivity and competitiveness laid the foundations for a highly prosperous quarter century. Australians, though, are flunking the four critical tests of economic reinvention.
First, they largely spent their commodity riches rather than reinvested them. To keep the economy growing during the GFC and mining bust, governments used tax breaks and other inducements to encourage consumer and housing booms.
As a result, federal government budget deficits will persist for some years to come, even on the most optimistic p economic forecasts. Likewise, Australian household debt has kept rising. It is now the second-highest in the OECD after Norway’s.
Second, crucial adjustments by the mining and energy sectors to their new, more moderate reality still have a long way to run. Mining, for example, has made only 70 per cent of the necessary reduction in capital spending and only 60 per cent on labour.
This is the assessment of the 2016 annual report on Australian economics and politics by the Committee for Economic Development of Australia, a reputable think-tank. The report is available at nz2050.com/OzCEDA
Third, Australia ranks only 27th on business sophistication, one of 12 ‘‘pillars’’ in the World Economic Forum’s assessment. Within this, it is only 26th on natural competitive advantage, indicating it is too reliant on unprocessed commodities. It is 61st on the breadth of its value chains, indicating its downstream customers reap most of the rewards from Australia’s exports.
Similarly, Australia ranks only 23rd on the innovation pillar. It scores well on the quality of its scientific research but poorly on all that should flow from it such as patents, R&D spending by companies, commercialisation, and advanced technology procurement by the government.
Australia continues to slip down global rankings on venture capital and private equity, such as the one from IESE and EMLYON, two leading European business schools, available at nz2050.com/ VCPEindex.
Fourth, the political response is woeful. Last December, Turnbull called for an ‘‘ideas boom’’, and unveiled a package of measures to stimulate it.
But the new money was minor – only A$1.1 billion (NZ$1.15b) over four years – and the policy changes cosmetic. For example, CSIRO remains a vast, 1990s-style government monolith across all fields of science and research. Its extra A$200m in the package fails to restore money cut in recent years by Liberal and Labor governments.
Similarly, the government of New South Wales recently mapped the state’s future out to 2056. Based on federal government studies, it said NSW would extract a further 10 billion tonnes of coal, triggering another mining, population and economic boom.
Australia’s delusions run deep.
Australian household debt is now the secondhighest in the OECD.