Australia's economy: how to resume with robust growth
- Christopher Prince
- Mar 13, 2017
- 5 min read
Since the news that Australia grew by 1.1 percent in the fourth quarter of 2016 broke out, compared to minus 0.5 percent in the third quarter, economists have caught their breath. The prospect of Australia falling into a recession, defined by two consecutive quarters of negative growth, after 25 years of uninterrupted growth, has moved away, at least for now.
However, if Australia, the “lucky” country, has avoided the fate of Brazil or Russia falling into brutal busts with the downturn of the commodity cycle since 2013, it is not immune to the “new mediocre” according to the IMF’s latest Executive Board Article IV Consultation on Australia. Indeed, its growth rate is now a lacklustre annual 2.4% compared to 3 to 4% during the last decade. But contrarily to some wrong interpretations, the IMF did not mean Australia should embrace a new “old-time fiscal religion” by tightening and balancing its budgets at the expense of fiscal stabilisers.
The IMF’s “new mediocre” statement is no advocacy for “old-time fiscal religion”
As a matter of fact, the IMF mentioned in its February 2017 report on Australia the inflation below its target rate of 2-3%, the weak wage growth and the rise of underemployment. These are not characteristics of a classic unemployment situation defined by excessive wages but rather “textbook” features of a Keynesian unemployment situation with its environment of insufficient demand and low inflation or deflation, and this is the situation Australia now experiences.
Doubtlessly, the IMF noted in its report that “continued demand support is needed to ensure a smooth transition to non-mining growth”. The concern for balancing the budget is therefore inappropriate and could even, if implemented, result in counterproductive results. Australia has a deficit of 2.4% and a debt of 36.8% of its GDP in 2015, which is far better than most European countries, the USA and Japan. So the need to rebalance the budget should not be a priority for its government. As the popular French say goes, “In the kingdom of the blind, the one-eyed man is king”. As for the risk of losing the AAA rating, Australia would lose it for sure if budget tightening would weaken even more its demand and plunge it into a real recession.
On the contrary, Australia should boost its demand, as well as modernise its economy
Reforms identified by the Harper Review are prepared to boost competition and productivity in the services sectors and to strengthen competition policy broadly, however they take time to be adopted.
Australia should go further by improving framework conditions to boost innovative capacity, encouraging productivity and innovation through a R&D policy and expanding access to low-cost, high-speed information and communication technology, as the OECD recommended in its latest report. The NBN has been a response to this long-time recommendation from the OECD but has taken a long time to roll out since its launch in 2011, is not really low-cost to the final users and is now facing challenges with 5G technology being rolled out by mobile and IoT companies.
The rise of inequalities highlighted by many observers and reports should be addressed with more inclusive measures for indigenous communities and new migrants to reduce socioeconomic gaps with the rest of the population.The welfare system has been eroded over the years and does not any more fulfil its role of wealth redistribution, but rather satisfy private profit appetites and precious talents are wasted. Welfare allowances should be revalorised to meet poverty lines and eradicate homelessness and the need for soup kitchens such as can be seen in the centre of big cities like Sydney (right in Martin Place).
Besides, Australia could consider adopting a universal basic income as it is considered by many European countries, in Alaska and Canada. This would have a triple positive economic benefit: sustain demand in a time of weak internal demand – demand from poor people are essentially for food and basic necessities that are not imported – and hence bring inflation within target, provide a solution to poverty and to the scarcity of work, lastly give unemployed people a chance to train themselves or start a business to become more employable.
Australia should trade with the whole world instead of relying only on a few trading partners
Australia has shifted its economy over the last thirty years toward Asia and singularly toward China since the downfall of Japan. This worked to its benefit during the China’s economic boom during the 2000s but this is no longer the case and Australia now runs the risks of putting all its eggs in the same basket and go bust with China as its economy is landing and missing development opportunities in other parts of the world, namely in Africa, Middle-East and Latin America. Many seem to have forgotten that the last Australian recession in 1991 was triggered by the Japanese “lost decade” recession.
Also, distance is no longer relevant in the cyber age as it is as easy to trade intangible services with Europe and America today as it is with Asia. Australia has the potentials with its educated and inventive workforce to become a world hub for new technologies and web services so it should not limit itself to Oceania and Asia.
Australia should also embrace the green economy, which is the economy of tomorrow, and could become the heaven of “eco-tourism”
Lastly, instead of relying on coal and fossil fuel which are destroying our environment and contributing to climate change, Australia should embrace the green economy revolution.
The dismantling of old fossil fuel mines and installations and the transition to a green economy, with the engineering and setting up of power generators using wind and solar energies – which Australia has no shortage of –, the insulation of buildings, the preservation of habitats and species, can bring numerous well-paid and sustainable new jobs. Whether we want it or not, the green economy will be the economy of the future and those countries who will embrace it the first will be the economic winners of tomorrow.
Besides, instead of developing a new coal mine near Townsville which can only bring a short-lived economic boost and directly threatens the Great Barrier Reef – we are seeing bleaching already happening – and its billions of dollars from tourism revenues, Australia has immense potentials with its unique wilderness and huge spaces to become the heaven of eco-tourism and the “vacation land” of the word. Rightly tapped, this sustainable and infinite resource can bring a valuable addition to the Australian economy, help it renew with its peaks and get out of the “new mediocre”.
