Friday, May 17, 2019

Australia: luck running out?

by Michael Roberts

Australia has a general election on Saturday.  The opposition Labor Party has been leading in the polls and given a redistribution of the seats in parliament that favours Labour, it is expected to gain office and defeat the incumbent coalition of the National and Liberal parties.

The usual thing said about Australia’s economy is that it is the ‘lucky country’.  It was the only OECD economy to avoid a slump during the Great Recession and has enjoyed 28 consecutive years of real GDP growth.

But there have been quarters of downturn and when the sharp increase in population (mainly through immigration) is taken into account (up from 15m in 1980 to 25m now), per capital growth is not so stellar – about 1.7% a year compared to average annual real GDP growth of 3.1%.

Even so, Australians have experienced a much faster improvement in national output and real incomes than just about any other advanced capitalist economy in the last 30-40 years.

However, growth has been slowing significantly in the last few years, down to 2.3% yoy on the latest data.  Indeed stripping out population growth, real GDP per capita has been no more than 1% a year since the start of the global Long Depression ten years ago.

Apart from immigration, Australia has been ‘lucky’ because of its close proximity to the fastest growing giant economy of China over the last 25 years. “Australia was uniquely placed to benefit from China and Asia’s long-term growth by exporting resources, agricultural produce and services to the region”.  Also the economy benefited from an influx of skilled labour through immigration from all parts but also immigrants who came with wealth of their own to invest.” (Hockey)

The relative success of Australian capitalism has been expressed in the profitability of its capital.  I collated three measures of Australia’s profitability as a capitalist economy since the early 1980s and profitability has risen by 40-60% – with only some signs of flattening out since the Great Recession.

But Australia is heavily dependent on its exports to China and world growth in general.

China is now the largest source of foreign investment in Australia, leapfrogging the US. Total investment in real estate was $74.6bn, up from $51.9bn a year earlier.  And it’s mainly in real estate.  This has led to a massive house price boom.  Household debt has rocketed to 165% of personal disposable income.

And although unemployment rates are relatively low, much of the new employment has been in temporary contracts and part-time.  As a result, while the employment participation rate has been rising and the official unemployment rate has been falling during the housing boom, the ‘underemployment’ rate is near all-time highs.

Wage growth is also slowing.

You can get a job in Australia, but don’t expect it to be on a permanent contract or full-time.  As a result, productivity growth has fallen from near 2.5% a year in the 1990s to under 1% a year now as capital investment is stagnating.

Australia may be a ‘lucky country’ but luck can change.  The economy relies on raw material exports and so is vulnerable to any plunge in commodity prices and if China were to slow down or the trade war with the US really spike, then Australia is vulnerable.  The OECD put it this way “a negative external shock cold prompt a sharp cut to incomes, a rise in unemployment and downturn in consumption.  This would increase mortgage stress and further escalate a fall in house prices.  A currency depreciation would also be likely.”

Ratings agency Moody’s has just forecast that Sydney house prices will drop by 9.3% this year, revised from its January prediction of 3.3%. It’s a similar story in Melbourne, with Moody’s original January forecast of a 6% decline updated most recently to an 11.4% fall this year. The Reserve Bank of Australia warned that more than 3% of Australian homes are in negative equity.

There is little to choose between the current government and the opposition on economic policy.  Both are pledged to cut back on government spending, cut taxes and yet run tight fiscal budgets.  It seems that government services and employees are the fall guys here.

And then there is climate change.  Of all the major advanced capitalist economies, global warming is likely to damage Australia more than any other.  Climate change in Australia has been a critical issue since the beginning of the 21st century.  Australia is becoming hotter and will experience more extreme heat and longer fire seasons. In 2014, the Bureau of Meteorology released a report on the state of Australia’s climate that highlighted several key points, including the significant increase in Australia’s temperatures (particularly night-time temperatures) and the increasing frequency of bush fires, droughts and floods, which have all been linked to climate change.

Yet the economy depends very much on its fossil fuel exports and developing the mining industry.  Non-renewable fossil fuels still account for about 85 percent of Australia‘s electricity generation. Australia is one of the world’s largest per capita emitters – producing some 1.3 percent of global carbon emissions in 2017 with only 0.3 of the world’s population.

While the centre-right government insists it is on track to meet Australia’s commitments under the 2020 Kyoto targets, it also seeks to placate the country’s powerful extractive industries and energy sector. A week prior to the election, incumbent prime minister Morrison announced $20.7m for a new school of mines and manufacturing at Central Queensland University.

Problems for Australian capital are hotting up in many ways.

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