Australia: headed for trouble?


They haven’t had a recession in almost 30 years “Down Under” which is one good reason to continue to call it “the lucky county”.

But trouble may be brewing.

The record is almost unblemished.

Australia has profited from unique geographical position; i.e., it was one of very few OECD countries that escaped a recession in the global financial crisis of 2008-09 and has exploited resources to build trade and investment relations in Asia.

Unlike other rich countries Australian workers income has grown strongly, albeit less steadily in recent years. With the world’s 13th-largest economy, it has the world’s tenth-highest per capita income. In 2018, it overtook Switzerland to become the country with the highest average wealth.

With a total of 25 million people, Australia has admitted as many as 190,000 newcomers annually — nearly three times as many, relative to population, as the U.S. Public debt is just 41% of gross national product —one of the lowest in the industrialized world. After an overhaul of the pension system nearly 30 years ago, workers are obliged to save for their retirement through private investment funds. Australia’s health-care system is a public-private hybrid with the government bearing only a relatively small proportion—an arrangement that remains a distant dream in the U.S. and Europe.

Living standards have risen because of export volumes of booming commodities that have strengthened the Australian dollar’s buying power overseas and prompted massive investment in new resource processing capacity, including major deals with Japanese energy companies to build liquid natural gas processing plants. Unemployment is relatively low.

But what has changed in this picture is increasing political instability.

Between 1983 and 2007, just three prime ministers held office (Bob Hawke and Paul Keating of Labor, and John Howard of the Liberals). Since then chief of government has changed hands six times. The last time a prime minister survived in office for a whole three-year term was 2004-07.

And subject to their temporary solution by the revolving governments are a series of growing economic-political problems.

  • The commodity boom appears to have peaked with prices in the key exports of coal and iron ore heading down. As investment falls in the resource-sector, Australia will have to adjust towards other economic activities. A precipitous fall in world commodity prices might prompt a very sharp exchange-rate depreciation, with investors consequently selling off Australian assets.
  • While Australia’s fiscal deficit and public debt compare favorably internationally, the government’s objective of a budget surplus by the early 2020s seems a proper goal.
  • A growing population is going to make further demands on what us now a seemingly adequate health system.
  • High affordability and a risk of macroeconomic impacts if prices fall rapidly in a booming housing market are seen as one threat.Building approvals have fallen to their lowest level in five years. Construction forecasts, particularly for the residential sector, offered an incredibly bleak picture for building activity in early 2019.
  • House prices are down 3.5 per cent from their peak, and in some cities things are even worse. [Perth is down 25 per cent since its peak in 2007, Sydney is down 8 per cent just this year and Melbourne is down 6.6 per cent this year.] Supply will rise even further in 2019, with many large apartment projects set to finish. Even if all the apartments are pre-sold off the plan (they aren’t) and all the pre-sales settle smoothly (they usually don’t), when people move into these new apartments it will create a second round of vacant properties, some of which will be for sale.
  • In spite of several decades of manicured policy a wide socio-economic gap exists between Australia’s indigenous peoples and the rest of the population. [Indigenous Australians, about 3% of the population, have a life expectancy about 10 years lower, and an employment rate more than 25 percentage lower.]
  • Australia fasces climate change problems. Assuring water supply and mitigating risks from drought are increasingly difficult and expensive.
  • Transport infrastructure problems are prominent and ensuring efficient use of existing investments challenging.
  • Education needs to be improved what with Australia’s score in OECD PISA test [comparing performance of 15-year-old pupils internationally] above the average, falls short of top-ranking countries.
  • Australia has a fundamental tax structure problem: spending in Australian states is made up by large transfers from central government revenues (some with conditions attached). This imbalance helps drive national agendas, but implies less local tailored expenditures.

Sws-01-11-19

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