Economic Insider: A Year in Review
15 July 2016
Transition of national economy away from resource project construction continuing apace, but falling disposable income and dominance of part-time employment growth pose challenges.
The Australian economy is now in its 26th year of continuous expansion since recovering from the ‘recession we (apparently) had to have’. And that period straddles the dark days in the aftermath of the collapse of Lehman Brothers in September 2008, which plunged most advanced economies into their deepest recessions since the 1930s.
And more than a quarter of a century of unbroken growth down under also includes the recent and ongoing transition of the national economy away from the heavy reliance on the construction of big-ticket mining and energy projects to exploit the once in a multi-generational jump in commodity prices.
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A falling unemployment rate of less than 6 per cent surely is evidence that the transition is proceeding smoothly. Or is it? The employment growth that is driving the jobless rate lower, with a little bit of help from a falling participation rate - is overwhelmingly part-time employment. Of the 464,000 jobs created in the last three years, only 157,000 are full-time positions. So the full-time employment ratio continues on its inexorable decline (Figure 1).
The dominance of part-time employment is replicated in underemployment - where a person is willing and able to work longer hours than their employer can provide. The underemployment rate may have peaked, but only after hitting an all-time high of 8.5 per cent early last year. And in any case, it’s only come down a bit, and slowly at that.
So while real (inflation-adjusted) gross domestic product (GDP) grew by a none too shabby 3.1 per cent in the year to March, almost two thirds of the growth was due to the large excess of the volume of exports over imports. That’s no bad thing, to be sure, but now that commodity prices have fallen steeply, the income generated by the nation’s biggest export ‘aint what it used to be’.
No better example of the valuation effect on exports can be found than the big fall in the value of iron ore exports in 2014-15 - they fell from $75 billion, to $54 billion, even though the volume of Australia’s biggest export rose by 96 million tonnes, to a whopping 747 million tonnes.
That’s a big drop in national income by any measure. The decline in coal export revenues isn’t quite as dramatic, but is significant nevertheless, while lower oil prices are biting into the earnings from Australia’s burgeoning liquefied natural gas (LNG) exports as well. Not to mention the hit to the revenue sides of governments’ already stretched budgets.
National net disposable income contracted in 2015 for the first time since the GFC, and had hardly been growing at robust rates in the two previous years (Figure 2). And it’s not as if the sharp slowing in population growth is the main culprit - net disposable income per capita fell in each of the three years to 2015.
As the labour-intensive construction phase of the resources boom has given way to the production phase, net overseas migration into Australia has fallen from a peak of almost 316,000 in 2008, to just 177,000 last year. So population growth that peaked at 2.2 per cent in the year to December 2008, has eased back to 1.4 per cent, just a touch above its 25-year average (Figure 3).
Slower population growth and much more modest national income growth than during the construction phase of the resources boom has implications for all businesses that may have based their business models on a widely touted but never realistic commodity super cycle assumption.
Both households and the businesses from which they purchase goods and services face challenges from recent and prospective technological changes, ranging from ride-sharing passenger transport services, to additive manufacturing (3d printing), driverless vehicles, the fracking revolution in the US that continues to suppress oil and gas prices, and more broadly, so-called ‘digital disruption’.
Although of course technological advances present opportunities as well as threats. But in the face of stings in the tail of the GFC even before the UK’s shock decision to file for divorce from the EU, the disruptive side of technological changes seem to hold sway over business and consumer confidence just now, and not only in Australia.
The Brexit result in the UK has minimal direct implications for Australia, because the UK is a minor export market, but the local economy will not be insulated from prolonged weakness in equity markets or broader disruption to financial and other asset markets. Moreover, if contagion from the UK spreads to what is left of the EU, China is unlikely to escape unscathed, which would very quickly constrain the Australian economy via further significant falls in commodity prices.
None of that should be anyone’s base-case expectation, by any means, but equally it would be naïve to think Australia’s geographical isolation from Europe offers much in way of financial/economic insulation.
The Australian dollar has, as have all currencies, jumped sharply against the pound Sterling since the Brexit vote, but nevertheless remains much more competitive than when it tracked above parity with the US dollar all through 2011 and 2012 - when the resource construction industry was ‘crowding out’ the rest of the economy.
And nowhere is the benefit of a cheaper Australian dollar more evident than in the ultra-exchange rate sensitive tourism and education export sector. To be sure, a little over 2 million more local residents left Australia on short-term visits than foreigners visited Australia on the same basis last year (when the Australian dollar averaged 75 US cents), but that was 348,000 less than 2013, when the Australian dollar averaged 97 cents.
And the downward trend in the excess of departures of Australians over arrivals of foreigners has continued apace into this calendar year (Figure 4).
Short-term overseas and arrivals and departures include foreign students, who have to part with less of their own currency to study down under when the Australian dollar is cheaper. And even when the Australian dollar was ‘stronger for longer’, Australia’s export revenues from overseas students far exceeded payments made by local students to study overseas. But as the Australian dollar has depreciated steadily since April 2013, the excess of education-related credits (ie exports) over debits (imports) has grown from $13.4 billion in 2012, to $17.7 billion in 2015. So education exports as a share of total exports of goods and services has resumed its long-term uptrend (Figure 5).
Education providers aren’t the only exporters that benefit from a more competitive Australian dollar - growth in agricultural exports as trade-liberalisation agreements (TLAs) with key Asian economies progressively take effect will be boosted markedly if the Australian dollar stays below 75 US cents for months and years rather than days and weeks. In which case overseas buyers of Australian farm products, in common with foreign students, will have to part with less of their own currency compared to buying the goods from other countries.
The increase in the contribution of agricultural exports to the economy as a whole won’t be anywhere near as great as the recent boom in iron ore and now LNG exports, but it is likely to be more durable, if for no other reason than Australia is never going to oversupply the world market with one or more major rural commodities.
A more disperse profile of economic growth driven by a wider range of goods and services, even if it means growth in the overall economy (ie GDP) is less frenetic than it was during the resources boom, would not necessarily be such a bad thing if it gives the smaller end of town a greater share of the action. Mineral and energy resource booms tend to be capital intensive - although their construction phases are also labour intensive - and leave a large void when they end, or even when they transition from construction to production phases, which is starkly apparent as the iron ore price falls markedly.
Nevertheless, in contrast to the so-called ‘entrepreneurial’ boom of the late 1980s, which gave way to the recession of the early 1990s, Australia has a lot more to show for the most recent resources boom, including lots more mines and LNG export facilities that will underpin economic activity and tax receipts for governments for their entire lifespan of 20 years or more, rather than the 2, 3 or maybe 4 years it takes to construct them.
Sure, the big mining and oil/gas companies are cutting costs savagely, but they still maintain significant operations across Australia, whereas many of the iconic business names that fueled the boom of the late 1980s were swallowed whole by the recession that followed.
That recession was triggered by the very high interest rates of the late 1980s. There is little risk of that in the foreseeable future as the 2016-17 financial year gets under way. If anything, the bigger risk is if interest rates dip too low for too long, in turn because inflation remains below the bottom of the Reserve Bank’s target range for too long. That’s a risk for sure, although widespread talk that Australia is already stuck in a deflationary trap is premature and unnecessarily alarming.
The biggest risk to Australia’s economy is if China’s own transition to a consumption driven economy stumbles badly, whether because it gets caught in the cross-fire of the UK’s break with the EU or from within, for instance if the middle kingdom’s financial system cracks under the weight of apparently massive debts racked up by borrowers in the ‘shadow’ banking system.
Nevertheless, Australia would only need to grab a market share of a one or two per cent of China’s transition for it to be a big deal in absolute terms for a small economy of just 24 million people at the bottom of the earth. China is already second only to New Zealand as a source of short-term visitors (Figure 6), having more than doubled its share since 2009.
But as important as exports are to Australia’s outward looking economy, providing goods and services to the domestic economy is still the bread and butter of all advanced economies. Including especially, ‘thanks’ to the ageing population, the health and social assistance industry category, which is now the largest employer in all states of Australia, having overtaken retail trade in 2010.
Retail’s reign as the nation’s biggest employer lasted less than 10 years, having dislodged manufacturing in 2001. The once mighty manufacturing industry accounted for 16 per cent of employment in the mid-1980s, but has fallen steadily, to 7½ per cent, less than the professional, scientific and technical services industry classification, which has more than doubled its share over the course of the last 30 years.
It may be that the recent acceleration in the growth in the professional, scientific and technical services employment category’s share of total employment includes a significant proportion of former employees in mining and associated industries who are now working part-time as consultants, but not necessarily earning as much per week/month/year as they were during the resources boom. Nevertheless, it also reflects the broad structural rise in the service economy as a central plank in the transition of the Australian economy.
Some household services - aged care comes to mind immediately - are not necessarily going to underpin an early or significant rebound in aggregate net national disposable income. Which, when coupled with modest population growth has implications for the operating models of businesses of all shapes and sizes. Those waiting for the next mineral resources boom will almost certainly get overtaken by the businesses that seize the opportunities presented by technological changes rather than exhaust their energies defending against the threats of the digital economy.
The information contained in this publication is of a general nature and is not intended to be nor should it be considered as professional advice. You should not act on the basis of anything contained in this publication without first obtaining specific professional advice. To the extent permitted by law, Bankwest, a division of Commonwealth Bank of AustraliaABN 48 123 123 124 AFSL/Australian credit licence 234945, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this publication. Based on Australian Bureau of Statistics data used pursuant to the Creative Commons Attribution 3.0 Australia license (available online at: http://creativecommons.org/licenses/by/3.0/au/)
Chief Economist, Bankwest