On some measures we look like an emerging economy- vulnerable. It’s time to get cracking. If we don’t, this could be the end of Australia as we know it.
Consumer confidence was up this week off the back of the warm and fuzzy “Malcolm feeling.” But feelings aren’t facts, and wear off fast. I’m here to drill down on the facts… and yes, I’ve got some concerns.
Just in case Malcolm was enjoying his first week in office too much, there was some news that sent a little shiver up my spine.
Last week, Brazil lost its investment grade credit rating, and was downgraded to “junk” status.
Three or four years ago it was all about the BRICs – Brazil, Russia, India and China. Now the wheels have fallen off the economy and the budget is in a real emergency. They’ve just announced $7bn worth of spending cuts, and an $8bn increase in taxes through a financial transaction tax.
And that still won’t cut it… even if it gets through parliament.
Could it happen here? No! We’ve got a gold-plated AAA credit rating. We’re a developed economy.
Thing is though, that that is less true than it used to be.
Because remember that Brazil was once a resources power-house too. But resources aren’t the golden goose they used to be.
If you look at Australia’s exports, Minerals and Metal Ores are down 34% since their peak. That’s bigger than the fall we saw during the GFC.
(Hat tip to: Alpha Beta Strategy and Economics)
But what’s going to fill the gap? Where’s the transition we’ve been waiting for. If you look at the prospects for exports, it’s not pretty. The high Aussie dollar that came with the mining boom, along with a willingness to let many industries go to the wall, has meant that many export-earners have withered and died.
As a percent of GDP, exports have gone backwards in pretty much every non-resource industry:
And that means we now have one of the narrowest export bases in history. In 2000, less than a third of our exports came from resources. Now just three commodities make up over half.
You have to go back to the Korean War Wool Boom in the 1950s to find such a narrow export base.
This is not a good thing. Multiple income streams are a source of strength. Ask any investor. Diversity is security. But now we have over half our eggs in one basket.
And that makes us more like Kenya than Germany. Before the mining boom our export concentration was more or less in line with other high-income countries. Now, some low-income countries like Nepal and Tanzania have more export diversity than we do!
Are we still a developed country? (High prices don’t make us developed.) Sure, we have first-world living standards, but the reality is a dependence on resources leaves us exposed to swings in global commodity markets like some banana republic.
And that means the budget is also dependent on a narrow base too. A $10 fall in iron ore markets can tear billions from forecast revenues.
It’s a slippery slope from here to Brazil.
A dependence on resources leaves us vulnerable.
It’s not hard to paint a terrifying picture. Imagine there’s some sort of global economic shock. Who knows what. It might have nothing to do with us.
But if global growth slows, demand for commodities can stall and prices will drop further.
At the same time as the government will be looking to sure up the economy, revenues will have the guts torn out of them.
They either go into austerity mode – cutting spending and raising taxes just as the economy needs them to be doing exactly the opposite.
Or they keep spending, the deficit balloons, and we lose our AAA credit rating. If that happens, bank funding costs go up (because the government guarantees the banks) and interest rates rise and/or they start calling in loans, just as incomes are falling and unemployment is rising.
So am I saying that I wish the mining boom never happened?
Nothing like that. If anything, I think the mining boom just brought forward the inevitable for the manufacturing sectors. Automotive manufacturing was always going to struggle. The mining boom just gave the government the cover it needed to finally let the struggling businesses die.
In the sense that it ultimately freed us up from perpetually flogging a dead horse, it could be a good thing.
But now we’ve got some challenges ahead of us. And we’ve got to get cracking.
Because we’re about 8 years behind the rest of the world.
Most economies have had to do some soul-searching. What do you do when everything is made in China?
The mining boom let us put off that question, but the mining boom is over. Now we have to find our ‘why’. We need to find our purpose. What is it that Australia has to offer the world?
So there’s a question for you Malcolm. Welcome to the job. Now where are we going and how do we get there?
In a way, I think its like the nation just lost its job. You can look at retrenchment two ways. Either it’s a disaster, or an opportunity to start over.
That’s where we’re at now.
There’s never been a better time for men of vision. Time to step up Malcolm.
What industries should we be backing? What will the Aussie economy look like in 50 years?