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06 Aug 2014

Australia’s powerful links to Asia

Paul Bloxham

by Paul Bloxham

Chief Economist, Australia and New Zealand, HSBC

Australia once suffered because of its distance from Western markets. Now it is blessed by its proximity to the world’s fastest-growing economies. No other economy in the Organisation for Economic Co-operation and Development (OECD) can boast a larger export exposure to Asia than Australia. Around 73 per cent of its exports go to Asia and these strong ties have been a key driver of the country’s recent success.

In the past six years, Australia’s economy has grown by 16 per cent. By comparison, the US has grown by only 6 per cent, Britain’s economy did not expand at all and Europe’s shrank by 2 per cent.

One reason for Australia’s outperformance has been strong demand for hard commodities, particularly from China

One reason for Australia’s outperformance has been strong demand for hard commodities, particularly from China. In its initial phase, this pushed up commodity prices sharply, boosting Australian incomes. The next stage saw an investment boom that made mining the main driver of GDP growth when most advanced economies were languishing. Now, the increase in resources exports is only just beginning, with most of these newly produced commodities destined for Asian markets.

The mining story is not over yet. The ramp-up in iron ore, coal and liquefied natural gas (LNG) exports should see 80 per cent of Australia’s exports heading to Asia by 2020.

But services, not mining, make up the bulk of the economy. So Australia has other export opportunities. This should increase demand for Australian food, tourism, education and business services. Chinese tourist visits to Australia have increased by 110 per cent since 2010 and, after years in decline, international student enrolments are rising again. The country has long been a large exporter of wheat, beef and dairy products, mainly to Asian consumers.

  • Around 73 per cent of Australia’s exports go to Asia: this could be 80 per cent by 2020
  • China, Japan and South Korea account for 54 per cent of Australia’s exports
  • By 2020, the export value of iron ore should rise 54 per cent, coal by 41 per cent and LNG by 330 per cent
  • 28 per cent of Australia’s population was born abroad

There are also strong population links to Asia. Migration has been dominated by arrivals from Asia since the mid-1980s but Chinese and Indian migrants have now overtaken incomers from Britain. Of the more than 5 million foreign-born Australian residents, 2 million came from Asia. Strong migration flows have helped Australia’s population grow at twice the OECD average rate and entry criteria mean migrants are typically younger and better qualified than the extant population, so they help boost Australia’s potential growth rate.

But financial flows directly from Asia remain comparatively small. The US and Europe still account for almost 60 per cent of total foreign investment in Australia, reflecting historical or cultural ties and their financial markets’ greater depth. However, many see investing in Australia as a platform for exposure to Asia’s growth story and as Asian financial markets mature, direct links should also grow.

But while Australia has a comparative advantage on hard commodities and energy, any edge in exporting services or agricultural products is less clear. Policymakers can play a role by reducing trade barriers but business has a critical role in exploiting new opportunities.

We remain optimistic about Australia’s economic outlook, forecasting 2.8 per cent growth in 2014, rising to 3.2 per cent in 2015. The long pivot towards Asia is far from over and should continue to support growth.

The research was first published on 18 July 2014.

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