The global crown for the longest stretch of uninterrupted economic growth is within sight for Australia.
The global crown for the longest stretch of uninterrupted economic growth is within sight for Australia. But it’s limping to the line as policy paralysis weighs on the nation’s prospects. Twenty-six years without recession have put Australia within two years of overtaking the Netherlands’ record growth streak and government, central bank and economist forecasts all suggest it’ll take the mantle. After all, the economy has a head start with 2.5 percent growth virtually baked in — 1.5 percent from population gains that are among the developed world’s quickest and 1 percent from resource exports feeding Asia’s giant economies.
Yet the reliance on rapid immigration is straining infrastructure, while mining profits fuel riches for stakeholders but do little for the vast majority of Australians living in major cities. Meantime, wages are barely growing, households carry some of the world’s heaviest debt loads, and productivity gains from the economic reforms of the 1980s and early 1990s have petered out.
There’s been no major economic reform since the turn of the century, with just about every attempt reversed or cannibalized by toxic politics. And the impact is starting to show. Just when the economy needs growth drivers outside of mining, a slide in global rankings for innovation and education suggest living standards could decline. The miracle economy that shrugged off the global recession is turning mediocre.
“Now that we don’t have the benefit of the mining boom, there’s nothing really that replaces it in terms of driving economic activity,” said Jeremy Lawson, chief economist at Aberdeen Standard Investments in Edinburgh and a former Reserve Bank of Australia economist. “The really big task of governments over the next 5 to 10 years is to deal with these big structural issues that Australia is facing. Potential growth is relatively weak.”
As sunshine begins to spread across major developed economies, Australia has fallen back to the middle of the pack. Its growth is behind the U.S. and euro zone’s respective 2.2 percent and 2.3 percent, and also lower than Canada’s and Germany’s. Australia is still ahead of the U.K., Italy and Japan and on par with France.
A decade of political infighting has seen the nation change prime ministers five times since 2007 and sidelined substantive policy debate. Meanwhile, attempts at reform have been held hostage by populists and single-issue parties who’ve harnessed voter frustration with mainstream politicians to take the balance of power in parliament’s upper house.
That political dysfunction is threatening the nation’s prospects. A policy vacuum around energy has seen electricity prices surge to among the highest in the world, despite Australia holding some of the largest coal and gas reserves on the planet. The building of a nationwide broadband network has become a political football plagued by cost overruns and delays, with internet speeds languishing below those of some former Soviet bloc nations. And home ownership among young Australians is the lowest on record as successive governments have failed to tackle generous tax breaks that have helped turn housing into a speculative financial asset.
“The inter-generational shift in wealth in Australia is really penalizing the young,” said Patricia Apps, professor of public economics at the University of Sydney. “Providing tax breaks for housing investors and then arguing that the property bubble it generates represents increased wealth makes no sense at all.”
Responses are required across several fronts. A taxation overhaul would provide incentive and encourage entrepreneurs, while reforming competition policy would help boost productivity. Investment is also required in human capital. Australia needs to radically improve science and math education and help gear a predominantly services economy to meet the rising demands of Asia’s burgeoning middle class.
“The resource base we need to build on now is the one inside our heads,” central bank Governor Philip Lowe said in September in the mining capital of Perth. “Growth in the future must come from doing things better and smarter, across the whole range of service industries,” he said, adding this required the creation of innovative and adaptable companies.
The portents aren’t great. Australia is made up of cozy oligopolies or even duopolies, making it a poor training ground for entrepreneurship. Indeed, recent surveys show few have any idea about Asia — despite 25 years of encouragement from policy makers to engage. Two thirds of board members in ASX 200 companies have no extensive experience operating there.
The failure to make progress is borne out in several global rankings:
Australia is No. 21 on the Global Competitiveness Index, behind Belgium and the United Arab Emirates, with restrictive labor rules and tax cited as the most problematic factors It slipped to 23 from 19 in the latest Global Innovation Index, behind France, Iceland and China The percentage of Australian children learning a foreign language has slumped to 10 percent from 40 percent in the 1960s Young Aussie students are slipping behind in math, reading and science, overtaken by Slovenia, Vietnam and Korea, according to the Program for International Student Assessment.
Meanwhile, household debt is at a record-high 194 percent of income, compared with 104 percent in the U.S., wages are stagnant and policy makers are fretting that consumers could be spooked into pulling back. That would be a major hit given household spending accounts for more than half of gross domestic product.
The Reserve Bank of Australia left its benchmark interest rate unchanged Tuesday at a record-low 1.5 percent, noting again that growth in housing debt has been outpacing weak gains in household income for some time now.
Still, conditions are far better than during Australia’s last recession in the early 1990s, when unemployment topped 11 percent. These days, the jobless rate is half that while inflation and growth are sitting just under 2 percent. But growth has been flattered by immigration, and when looked at on a per capita-basis, its recession-free streak loses some gloss.
Bright spots include the education and tourism industries — Australia welcomed a record 1.2 million Chinese visitors last year, and demand is expected to increase. The downside to that is Australia chronically under-invested in hotels following the Sydney Olympics in 2000, leaving it rushing to catch up to other countries. An appreciating currency hasn’t helped.
Education is the country’s third-biggest export, yet one of the few areas where the government is trying to pass budget cuts is universities, potentially undermining their role as a center of innovation.
Nevertheless, efforts to return the budget to surplus following almost a decade of deficits is a bright spot of government policy. But even that is a struggle as the electorate has been lulled by good times during much of the growth stretch and is unwilling to tighten its belt or take the medicine of reform to improve the economy’s longer-term prospects.
“Crisis begets reform in Australia,” said Aberdeen Standard’s Lawson. “What tends to happen is you wait for the shock, you wait for the crisis, and the crisis comes and you’re forced to make much more significant adjustments at the time. So it’s a crisis-reform-growth-complacency cycle.”