Australia is entering its 23rd year of continuous GDP growth, a feat unmatched in its history and impressive compared to peers. It avoided significant downturns despite major negative global shocks. GDP significantly outperformed its peers, growing 14 per cent since the financial crisis began in 2008 compared with 6 per cent in the US, 7 per cent in Canada and falls of 2 per cent in the UK and the eurozone, thanks largely to Australia’s strong ties with China, whose economy grew by 60 per cent over this period.
However, it would be foolhardy to think Australia has tamed the business cycle. While a significant downturn is not our central case, it can never be ruled out and local risks are higher in 2014 and 2015 than previously.
Australia’s long period of growth was supported by two booms. The first was the housing price and credit boom of the 1990s and early 2000s. Then, just as that ended, the mining boom arrived, largely driven by Chinese demand and a long period of global underinvestment in capacity to produce commodities.
The mining boom came in three stages: first, commodity prices rocketed, then mining investment ramped up, and finally, resources exports grew strongly.
But commodity prices peaked in 2011 and the investment stage probably climaxed in 2013. And while the export ramp up should run for many years yet, the biggest positive impact of the mining boom is now likely to be behind us. Mining GDP should continue growing as higher exports more than offset the fall in investment over the next two years, but the sector’s period of outperformance seems to be in the past.
The country faces another challenge: the long boom has affected economic behaviour
Australia faces another challenge: the long boom has affected economic behaviour. Governments treated the jump in incomes as though they were permanent and are now left with a structural fiscal deficit. Even a small fall in commodity prices has left the government with less ability to support the economy. Tax cuts and the failed attempt to introduce a substantial mining tax, plus an increase in public spending after the global financial crisis, have contributed to a structural budget deficit.
However, to suggest that Australia’s best days are behind it ignores some crucial facts. First, Asia’s demand for commodities should continue to grow strongly as rising living standards require better infrastructure and more reliable electricity supplies. Australia has built a massive amount of capital to meet this demand.
Second, the bulk of Australia’s economy is outside of the resources sector. And third, as Asia’s middle classes expand, demand for services such as education, tourism and financial services will increase. The opportunities presented by Asia’s continued emergence are the most likely source of Australia’s “third boom”.
Australia’s government debt remains very low by global standards and its economy is fairly flexible. However, the outlook after the mining boom will be tougher than it was in recent years. Policymakers need to focus on lifting productivity and improving Australia’s competitiveness if a third boom is to get traction.
This research was first published on 24 January 2014.