“Jobs and growth”: a simple two-word mantra our government leaders deploy to keep us focused on the economy.
And it’s been well worth keeping our focus on for a long while; in September 2016, Australia had its 100th quarter without a recession. That’s an unprecedented 25 years of uninterrupted growth.
Yep, the total value of all goods and services we produce – our Gross Domestic Product (GDP) in economics speak – has been on the up and up.
We produce all sorts – from education, travel and financial services to “soft commodities” like beef and wheat and seafood – but for more than a decade, the “mining boom" has been the key driver of the nation’s wealth, spurred in large part by China’s voracious appetite for Australia’s iron ore, coal and gas.
But growth is slowing and current employment levels indicate we’re operating at less than full capacity, so just how is the economy tracking this Australia Day?
Economist and commentator Saul Eslake says it’s in a state of flux; “trying to put together a portfolio of more sustainable growth options” in wake of the mining boom.
“The country is transitioning away from growth that was driven by mining investment [and] really struggling to find any obvious single driver of economic growth,” Eslake says.
Let’s talk trade
Another way to look at the country’s economic health is our “terms of trade” – the ratio of how much we receive for our exports to what we pay for the goods and services we import.
Australia’s terms of trade during the mining boom years of 2000-2011 improved by 97%; that’s another good story driven – again – by China’s need for “hard commodities” like iron ore.
Japan and the Republic of Korea, two of our five largest trading partners, have also shown healthy appetites for our mineral exports.
“No other commodity-exporting nation gained as much over the same interval,” Eslake says.
But Jim Minifie, productivity growth program director at the Grattan Institute, points out that with every up, there’s an inevitable down – what economists like to call a “correction”.
“Economies like ours, which have been through big resource price and investment booms typically do have slower GDP growth on the other side,” Minifie says. “We have experienced that in recent years.”
Our two-way exchange with China makes up almost a quarter of Australia’s total trade, so when China’s growth slows, so does ours. And as China’s economy matures, its needs change – driving down demand (and prices) for Australia’s minerals.
“It’s inevitable over time that their growth rate will slow and the reason is simply because it’s reaching middle income status,” Eslake says. “And as more reach that status the demand will shift away from ‘hard’ commodities like iron ore and coal towards soft commodities and household and business services.”
Beyond the boom
Eslake says China’s move to a service economy reduces Australia’s competitive advantage when it comes to meeting our largest trading partner’s needs.
“We’ll face much more competition meeting China’s and other Asian economies’ demands for soft commodities and services than we did with iron ore,” says Eslake. “When it comes to processed foods or tourism or education or financial services, you’re talking about competing with almost every advanced economy in the world.”
Eslake says Australia needs to rely on a diverse range of industries to drive the next period of growth: housing fuelled by low interest rates – although there are already signs the housing cycle will peak in 2017; business and personal services such as tourism and, finally, infrastructure – controlled in large part by state governments that vary in their capacity and willingness to undertake such spending.
“You can see this as a basket of sustainable activities that will create jobs and growth,” Eslake says. “There is no one approach that will replace mining as the driver of growth.”
Just as Australia grapples with a new direction, the global economic outlook is also uncertain.
Beyond China, Minifie sees some concern in the “softness” of some high-income economies. Then there’s the question of how the new US President Donald Trump will affect the global economy.
“Japan and the EU have seen quite slow growth and together they make up 20% of the world economy, though there have been signs that their growth is starting to revive,” Minifie says.
“Trump has significantly increased uncertainty in the economic, strategic and political spheres; a huge wildcard there.”
Meanwhile there are elections looming in key EU states such as the Netherlands, France and Germany, uncertainty continues around the effects of Brexit and there is an increasing need to shift to a low-carbon economy.
All up, it’s easy to see why business and policymakers are struggling to chart strong economic pathways.
But with risk comes opportunity.
“Offsetting all the negatives, our opportunities in the Asian Century are huge,” Minifie says. “You want to find ways to tap into India, Indonesia and rest of South-East Asia, which are continuing to become more developed.”
For Eslake, the two most obvious areas in which to invest are infrastructure and education.
“They are things that governments have a major stake in and these are enablers for others to create employment and growth.”